SIEMENS INFORMATION PROCESSING SERVICES 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.27.10.2011 passed under Section 143(3) r.w.s. 144C(5) of the Income Tax

1 “ Assessment and reference to Transfer Pricing Officer are bad in law a) The final order issued by the Deputy Commissioner of Income-tax – Circle 12(3) [‘ACIT’ or ‘AO’], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Siemens Information Processing Services Private Limited (‘the Appellant or ‘the Company’), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 [‘the Act’]. b) The AO has erred in law in making a reference to the Transfer Pricing Officer [‘TPO’], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The fresh comparable search undertaken by the TPO is bad in law c) The TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant’s analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. d) On the facts and in the circumstances of the case and in law, the learned TPO erred in and the Hon’ble Dispute Resolutions Panel (‘DRP’) further erred in upholding / confirming the action of the TPO in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a pre – requisite condition to make any adjustment under the provision of Chapter X of the Act. 2 Comparability analysis adopted by the TPO for determination of arm’s length price a) The AO/TPO grossly erred on facts in benchmarking the transactions of the captive call centre services of the Appellant with companies operating as full fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-à-vis comparable companies. b) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study. c) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. d) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables.

3 IT(T.P) A No.1359/Bang/2011 e) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. f) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2007) and inconsistently applying such filter. g) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having IT enabled service revenue less than 75% of total operating revenue and inconsistently applying such filter, without considering the specific segmental results. h) The AO/TPO erred on facts in arbitrarily rejecting companies earning less than 25% of revenue from exports. i) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the comparability. j) The AO/TPO erred on facts and in law in considering a set of ‘secret data’, i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. k) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. 3 Erroneous data used by the TPO a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies. 4 Non-allowance of appropriate adjustments to the comparable companies, by the TPO

The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, and (c) risk profile between the Appellant and the comparable companies. 5 Mark-up on recovery transactions

The AO/TPO erred on facts and in law, in making adjustments on the alleged ground that the Appellant should have charged a markup on pass-through transactions entered into with the associated enterprises, without appreciating the submissions filed by the Appellant in respect of the pass through transactions. 6 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant.

4 IT(T.P) A No.1359/Bang/2011 7 Grant of lower deduction under section 10A of the Income-tax Act, 1961 The DRP and the AO erred in computing the deduction under section 10A of the Act at Rs. 254,478,091. Without prejudice to the generality of the above, the DRP and the AO has erred, inter alia, in: a) Reducing expenses incurred in foreign currency towards travel amounting to Rs. 13,711,099 from the export turnover; and b) Not making a corresponding reduction in the total turnover after having reduced expenses incurred in foreign currency towards travel amounting to Rs. 13,711,099 [item mentioned in (a) above] and communication expenses of Rs. 6,088,007 from the export turnover 8 Non-grant of carry forward of current year business losses The AO erred in not allowing the current year business loss of Rs. 7,720,426.

9 Directions issued by the DRP a) The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relation to the draft assessment order issued by the AO/TP order. b) The DRP erred in facts and law in confirming the draft order of the AO/TPO. 10 Initiation of penalty proceedings The Assessee submits that based on the facts and circumstances of the case, there was no basis for the AO to propose to initiate proceedings under section 271(1)(c) of the Act. 11 Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal c) The Appellant further prays that the adjustment in relation to Transfer Pricing matters made by the Learned AO/TPO and upheld by the Honorable DRP be deleted.”

3. Ground Nos.1 to 7 are regarding Transfer Pricing Adjustment. The assessee-company was incorporated on 13.10.2000 and part of Siemens

5 IT(T.P) A No.1359/Bang/2011 Worldwide Group. The assessee is engaged in the business of providing software services related to back office operations on contract basis to overseas Siemens Group companies. The assessee has reported the financial results as well as international transactions which are reproduced in the order under Section 92CA of the Act by the Assessing Officer / Transfer Pricing Officer (in short ‘TPO’) in paras 2.4 and 2.5 as under :

Description IT Enabled Services Operating Revenues 95,21,87,409 Operating Expenses 84,39,56,717 Operating Profit 10,82,30,692 Operating Profit to Expenses 12.82%

INTERNATIONAL TRANSACTIONS Amount (Rs.) IT enabled and support services 95,21,87,409 Recovery of salaries and allowances 8,02,389 Recovery of other expenses 42,17,427 Recovery of salaries and other 1,81,54,111 expenses In the Transfer Pricing (‘T.P’) document, the assessee has selected 22 comparable companies and applying Transactional Net Margin Method (‘TNMM’) as Most Appropriate Method (‘MAM’) for bench marking its international transactions in ITES segment. The TPO has rejected the TP study analysis of the assessee on the ground that the assessee has not applied certain

6 IT(T.P) A No.1359/Bang/2011 filters which should have been applied. The TPO caried out a fresh search and selected 27 comparable companies including 7 comparables from the list of the assessee. The comparables selected by the TPO for determining the Arm’s Length Price (‘ALP’) are as under :

S.No. Name of the Company Operating Adjusted Margin Margin on Cost (Annexure C of TP Order) 1 Accentia Technologies Ltd. (Seg) 30.61% 25.55% 2 Aditya Birla Minacs Worldwide Ltd 11.98% 10.40% (Earlier known as Transworks Information Services Ltd.) 3 Allsec Technologies Ltd 27.31% 25.10% 4 Apex Knowledge Solutions Pvt Ltd 12.83% 12.41% 5 Appollo Healthstreet Ltd -13.55% - 23.56% 6 Asit C. Mehta Financial Services Ltd. 24.21% 22.18% 7 Bodhtree Consulting Ltd. (Seg) 29.58% 28.99% 8 Caliber Point Business Solutions 21.26% 19.59% 9 Cosmic Global Ltd 12.40% 10.72% 10 Datamatics Financial Services Ltd (Seg) 5.07% - 2.99% 11 Eclerx Services Ltd 89.33% 85.68% 12 Flextronics Software Systems Ltd. (Seg) 8.62% 5.41% 13 Genesys International Corporation Ltd 13.35% 8.03% 14 HCL Comnet Systems & Services Ltd (Seg) 44.99% 43.50% 15 ICRA Techno Analytics Ltd (Seg) 12.24% 10.80% 16 Informed Technologies India Ltd 35.56% 34.24% 17 Infosys BPO Ltd 28.78% 28.03% 18 Iservices India Pvt Ltd 49.47% 48.04% 19 Maple Esolutions Ltd 34.05% 29.62% 20 Mold-Tek Technologies Ltd. (Seg) 113.49% 114.89% 21 R Systems International Ltd (Seg) 20.18% 17.69%

7 IT(T.P) A No.1359/Bang/2011 22 Spanco Ltd (Seg) 25.81% 19.02% 23 Triton Corp Ltd 34.93% 27.05% 24 Vishal Information Technologies Ltd 51.19% 41.77% 25 Wipro Ltd (Seg) 29.70% 29.56% 26 Nittany Outsourcing Services Pvt Ltd 11.50% 9.89% 27 Accurate Data Converters Ltd 50.68% 47.61% Total 30.21% 27.01% Accordingly, the TPO determined the mean margin of comparables at 30.21% and after granting working capital adjustment the adjusted mean margin has been arrived at 27.01%. Thus the TPO has proposed an adjustment under Section 92CA of Rs.12,59,81,295. The assessee challenged the action of the TPO/A.O by filing the objections before the DRP regarding the functional dissimilarity of the various companies selected by the TPO as well as erroneous computation of working capital adjustment. The DRP has rejected the objections raised by the assessee regarding functional dissimilarity of the companies selected by the TPO. However, the DRP has directed the TPO/A.O to consider the correct working capital adjustment.

4.1 Before us, the assessee is seeking exclusion of 16 companies out of the 20 companies selected by the TPO.

8 IT(T.P) A No.1359/Bang/2011 4.2 The assessee has also filed an additional ground vide application dt.

3.5.2016. The additional grounds raised by the assessee are as under :

2. The learned TPO erred in selecting Wipro Limited and Infosys BPO Limited as comparables in the order u/s 92CA despite that the functional and risk profile, including the scale of operations, intangibles, etc. of Wipro Limited and Infosys BPO Limited cannot be compared to the IT enabled services rendered by the Appellant. 3. The learned TPO erred on facts in selecting Maple Esolutions Ltd. as comparable in the order u/s 92CA, despite that the said company was functionally not comparable to the IT enabled services rendered by the Appellant, in addition to having peculiar economic circumstances and extraordinary growth during FY 2006-07. 4. The learned TPO erred on facts in selecting Triton Corp. Ltd. as comparable in the order u/s 92CA, despite that the said company was functionally not comparable to the IT enabled services rendered by the Appellant. 5. The learned TPO erred on facts and in law in not applying an employee cost filter of 25% and related party transaction filter of 15% on sales as a criterion for selection / rejection of comparable companies in the order issued u/s 92CA. The Learned Panel erred in upholding the actions of the TPO. The Appellant prays accordingly.” Thus the assessee is seeking exclusion of certain companies which have been selected by the assessee in the TP Analysis Study apart from raising the ground for applying employee cost filter of 25% and Related Party Filter (‘RPT’) filter of 15% of the sale.

9 IT(T.P) A No.1359/Bang/2011 Representative has submitted that the functional comparability of the companies namely Wipro Ltd., Infosys BPO Ltd., Maple E-Solution Ltd. and Triton Corporation Ltd. have been examined by this Tribunal in a number of cases and it was found that these companies cannot be considered as functionally comparable with the ITES provider. He has relied upon various decisions including the decision of this Tribunal dt.23.11.2015 in the case of Flextronics Technologies India Pvt. Ltd. reported in 65 taxman.com 258 as well as the decision in the case of M/s. Online India Pvt. Ltd. Dt.18.3.2015 in IT(TP)A No.1036/Bang/2011. The learned Authorised Representative has also relied upon the decision of the Special Bench of ITAT, Chandigarh in the case of Quark Systems Ltd. 38 SOT 307 and submitted that even if the assessee has taken a particular company as comparable in the TP study, the assessee is entitled to point out before this Tribunal that the said enterprise has wrongly been taken as comparable. The learned Authorised Representative has contended that the TPO has not applied the employee cost filter and therefore some of the companies selected by the TPO failed the test of employee cost factor of 25%.

In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of M/s. Google India Ltd. 29 taxman.com 412

10 IT(T.P) A No.1359/Bang/2011 and submitted that the Tribunal has held that the employee cost filtor of 25% should be applied in the ITES segment also. As regards the RPT filter of 15%, the learned Authorised Representative has submitted that in a series of decisions the Tribunal has taken a consistent view that the RPT filter should not be more than 15% and therefore the companies which are having more than 15% related party transactions should be excluded from the list of comparables selected by the TPO.

11 IT(T.P) A No.1359/Bang/2011 has applied 25% which was not objected by the assessee either before the TPO or before the DRP and therefore at this stage the assessee cannot be allowed to raise fresh objections which were not raised before the authorities below.

“30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT(A) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant with this new branch of law when proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This 12 IT(T.P) A No.1359/Bang/2011 has not been done in this case. We would only say that prima facie, as per the material, to which reference has been drawn by Shri Aggarwal, Datamatics does not appear to be comparable. 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 Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations.” “38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the AO. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before Revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly.”

Thus in view of the matter that the functional comparability has already been examined by this Tribunal, we admit the additional ground raised by the assessee regarding functional comparability of these 4 companies for deciding the same on merits.

13 IT(T.P) A No.1359/Bang/2011 when there is no difficulty in selecting the comparables, the RPT filter should not exceed 15% of the sale/revenue. In the case on hand, the TPO has selected as many as 27 comparables which shows that there was no difficulty in finding the comparable companies and therefore we are of the considered opinion that the RPT filter shall not exceed 15% of the total sale instead of 25% filter aplied by the TPO. Only in the exceptional cases where the comparable companies are not easily available and only few companies are found during the search then the tolerance range of RPT can be relaxed to the maximum limit of 25%.

Since the case on hand is not an exceptional case therefore in our view the extreme limit of 25% of RPT filter cannot be applied in this case. In view of the above facts, we admit the additional grounds raised by the assessee regarding the RPT filter at 15%.

9.1 The next additional ground raised by the assessee is regarding the application of employee cost filter at 25%.

9.2 Having considered the rival submissions as well as the relevant material on record, we find that neither the assessee nor the TPO applied any employee cost filter while selecting the comparable companies. The learned Authorised Representative of the assessee has placed reliance on the decision of the co-

14 IT(T.P) A No.1359/Bang/2011 ordinate bench in the case of Google India Ltd. Vs. DCIT (supra). However, we find that in the said case, the TPO determined the ALP in respect of two segments i.e. software development services and ITES and the TPO aplied the employee cost filter of 25% in software development segment but refused to apply the same in the ITES segment. In those circumstances the Tribunal held that once the TPO has applied the employee cost filter in software development segment, then the same shall be applied in the ITES segment as

per the rule of consistency. In the case on hand when no filter was applied either by the assessee or by the TPO regarding employee cost therefore fixing a particular limit at this stage will not be appropriate as the TPO has to decide the appropriate filter of employee cost. Though in principle, we agree with the contention of the learned Authorised Representative that the employee cost filter should be applied at 25% however even if it is applied to 1 or 2% less or more will not cause any substantial effect or would be prejudicial to the interest of either of the party. We are of the view that the ITES sector is employee intensive and therefore the cost of the employees cannot be ignored for selecting the comparable companies. If in a particular case of company, the employee cost is less than the average cost previaling in the industry then it is

15 IT(T.P) A No.1359/Bang/2011 necssary to find out the reasons of such a low employee cost which is against the normal business practice in this industry. Accordingly we admit the additional ground raised by the assessee with a rider that the TPO has to apply a proper filter of employee cost and then apply the same on all the comparable companies in the set of comparables.

(i) Apollo Healthstreet Limited : In this case, the RPT as per the details recorded by the TPO is 17.77% therefore this company fails the RPT threshold limit of 15% and accordingly directed to be excluded.

(ii) Asit C Mehta Financial Services : This company has reported RPT at 15.76% and therefore it fails the filter of 15% RPT. Accordingly, we direct the A.O./TPO to exclude this company from the set of comparables.

16 IT(T.P) A No.1359/Bang/2011 11. The next set of comparables which are having very low employee cost cannot be regarded as good comparable. The following companies have reported very low employee cost :

(i) Moldtek Technology Ltd as shown only 7.59% of employee cost to total sale.

(ii) Spanco Limited has reported the employee cost as 7.16%.

(iii) Vishal Informtion Technologies Ltd. - has recorded employee cost of 2.30% (iv) Accurate Data Converters Ltd has reported at 1.61% employee cost.

Principally, we are of the view that such a low employee cost shows a different business model and it appears that these companies are outsourcing their business however since the TPO has not examined this issue therefore we set aside this issue to the record of the TPO/A.O for limited purpose of verification of the reasons for such a low employee cost and if it is found that low employee cost is due to a different business model then these companies shall be excluded from the list of comparables.

i) M/s. Online India Pvt. Ltd. Vs. DCIT Dt.18.3.2016 in IT(TP)A No.1336/B/ ii) M/s. Stream International Pvt. Ltd. dt.10.10.2014 53 taxman.com 19

(Mum)

18 IT(T.P) A No.1359/Bang/2011 this company is functionally comparable. He has further contended that any insignificant revenue from the activity other than the ITES would not effect the comparability of this company.

13.3 We have considered the rival submissions and the relevant material on record. At the outset we note that as per the Directors Report of this company, there was an amalgamation of its two subsidiaries during the year under consideration w.e.f. 1.4.2006 which is reported as under : “ Company’s business growth and prospects :- During the year Mr. Pradeep Viswambharan took over the management of the company. As per the Business plans to consolidate the company has filed petition for amalgamation of two of its subsidiaries namely Geosoft Technologies (Trivandrum) Ltd. and Iridium Technologies (India) Pvt. Ltd. and successfully amalgamated them with the company with effect from 1.4.2006 as per the respective High Court orders. The company has with the permission of the ROC Mumbai has extended the holding of the AGM to facilitate the consolidation of accounts.

There is no dispute that amalgamation, merger or acquisition is considered as extra-ordinary event for the purpose of considering a particular entity as comparable. The co-ordinate bench of this Tribunal in the case of Sony Mobile Communications International AB (India Branch Office) (supra) in para 7.3 has observed as under : “ 7.3. Significantly, page 23 of the Annual report of this company divulges that: ‘During the year 2008- 09, the company has acquired Citigroup Inc.’s (Citi) 96.26% interest in TCS e-Serve Ltd. (formerly known as Citigroup Global Services Ltd.), the India-based capital BPO, for a total consideration of USD 504.54 million.’ This indicates that this company made acquisition during the year in question which is an extraordinary financial event. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs.

19 IT(T.P) A No.1359/Bang/2011 DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been adopted by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. The ld. DR contended that the mere fact of acquisition and merger should not be considered as a decisive test for exclusion of a company unless it has affected the profitability due to such merger etc. We are not inclined to accept this contention for the obvious reason that once acquisition and merger etc. has taken place, it is always likely to affect the profitability of such a company in the year of acquisition etc. There cannot be any standard yardstick to measure the impact of such a factor on the overall profitability of such a company. It is relevant to highlight that we are considering the exclusion of a company on this score. In our considered opinion, when other comparables are available, the exclusion of a probable comparable company cannot have much significance in contrast to a situation of inclusion of a probable incomparable. Respectfully following the above referred decisions, we hold that TCS Ltd. cannot be considered as comparable with the assessee. The same is directed to be excluded.”

Therefore, for limited purpose of considering the said record, we set aside this issue to the record of A.O/TPO and then decide the issue of comparability of this company in the light of the above observations.”

In view of the above finding, we set aside this issue to the record of the A.O/TPO to decide the comparability of this company in the light of the above observations. Needless to say the TPO has to afford an opportunity of hearing to the assessee.

15.1 This company was selected by the TPO however the assessee objected the comparability of this company and inclusion of the same in the list of comparables.

15.2 Before us, the learned Authorised Representative of the assessee has submitted that this company provides open and end to end web solution,

20 IT(T.P) A No.1359/Bang/2011 software consultancy, design and development of solution, therefore it cannot be compared with BPO company. He has further submitted that data analysing services to companies for whom they have developed the software. Thus two segments is extremely linked to each other as data analysing also includes an element of software development. He has further contended that information obtained by the TPO under Section 133(6) is contrary to the annual report. The learned Authorised Representative has pointed out that this company is following the method of revenue recognition from software development segment when the project is completed or software is finally developed and invoice to the client whereas the expenditure is recognised as and when the expenditure is incurred towards development of software. Thus the learned Authorised Representative has submitted that this company is not functionally comparable with the assessee. In support of his contention, he has relied upon the following decisions : i. AOL online India Pvt. Ltd. Vs. DCIT (IT(TP)A No.1036/Bang/2011 Dt.18.3.2016. ii. First Advantage Offshore Services Pvt. Ltd. Vs. DCIT ( IT(TP)A No.1086/Bang/2011 dt.30.4.2013)

21 IT(T.P) A No.1359/Bang/2011 15.3 On the other hand, the learned Departmental Representative has submitted that has the TPO obtained the specific information under Section 133(6) and therefore the TPO has considered only data cleansing segment which is in the nature of ITES. He has relied upon the orders of the authorities below.

15.4 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been examined by this Tribunal in a series of decisions including the decisions relied upon by the learned Authorised Representative. At the outset we find that in the recent decision in the case of Pole to Win India Pvt. Ltd. (supra), we had the occasion to examine the comparability of this company and given the finding in para 7.3 as under :

“ 7.3 We have considered the rival submissions and the relevant material on record. In case of Ariba Technologies India Pvt. Ltd. (supra), the objections against this company was on the ground of extra-ordinary profit and therefore the Tribunal has no occasion to examine the functional comparability of this company except the ground raised by the assessee regarding extra-ordinary profit margin. The learned Authorised Representative of the assessee has referred to the Annexure to the Directors Report wherein segment-wise and product-wise performance has been reported as under : “ Segment-wise and product-wise performance Bodhtree has only one segment, namely software development, being a software solutions company, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technology. Outlook

22 IT(T.P) A No.1359/Bang/2011 Given the steady growth in the niche areas like data cleansing and software development, and the new initiatives in the areas of e-publication and e-learning, the management has reason to be optimistic about the future growth.” Revenue Recognition Revenue from software development is recognized based on software developed and billed to clients.” Thus it is clear that this company is having one segment namely software development under which this company is providing software solutions including open and end-to-end web solution, software consultancy, design and development of solution. Further, the company is also providing data cleansing and software development. These services are in the category of software development services and not in ITES. Accordingly, we are of the view that the software development segment cannot be compared with ITES segment and hence this company cannot be compared with the assessee's ITES segment. Accordingly, we direct the A.O./TPO to exclude this company from the list of comparables.”

Since both of us are party to the decision in the case of Pole to Win India Ltd. (supra), therefore we concur with our earlier view and accordingly direct the A.O/TPO to exclude this company from the list of comparables.

I. Flextronics Technologies India (P.) Ltd. Vs. DCIT (2016) 65 taxmann.com 258 (Bangalore – Trib.) II. Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT (2014) 43 taxmann.com 100 (Mumbai-Trib.) (SB).

16.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below.

16.3 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional profile of this company was examined by the Special Bench of Mumbai Tribunal in the ase of Maerk Global Centre (supra). By following the Special Bench decision, the Tribunal in the case of Flextronics Technologies India P. Ltd. (supra) has again considered the functional comparability of this company in paras 8.1.2 & 8.1.3 as under : “ 8.1.2 We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity of providing services including analytic services and data process solutions to its global clients. The service provided by Eclerx Services Ltd., is in various areas including capital market and therefore, the services are in the nature of consultancy and end to end support through trade centre including trade confirmation, settlement, transaction, maintenance and analytic and reporting. Thus it is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of providing high-end services involving decision making analysis which 24 IT(T.P) A No.1359/Bang/2011 requires thought process and evaluation of various facts and factors. Functional comparability of this company with that of simple BPO’s service providing company has been examined by the Special Bench in the case of Maersk Global Services (supra) in paras.82 & 83 as under : “82. In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.

83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP.

25 IT(T.P) A No.1359/Bang/2011 Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low end services of data processing. Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purposes of determining ALP. 8.1.3 We further note that the Hon’ble Delhi High Court in of 2015 dated 10/8/2015 has confirmed the view taken by the special bench of the Tribunal in the case of Maerks Centre. Accordingly, we direct the AO/TPO to exclude eClerx Services Ltd. from the list of comparables for the purpose of determining the ALP.”

No contrary view has been brought to our notice therefore, following the earlier orders of this Tribual, we direct the A.O./TPO to exclude this company from the list of comparables.

17.1 The learned Authorised Representative of the assessee has submitted that this company is following a different accounting year from 1st July to 30th June. Therefore, the financial data of this company are not contemporaneous to that of the assessee. This company is also engaged in the product and service in the area of connectivity services, security services and IT infrastructure management services. It enjoy unique position in the market in the BPO segment on account of its brand and unique intangibles. To support its contention, he has referred to the Director’s Report in the Annual Report of this company. Thus the learned Authorised Representative has submitted that this company cannot be considered as a good comparable to the assessee. He

26 IT(T.P) A No.1359/Bang/2011 has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Flextronics Technologies India Pvt. Ltd. (supra).

17.2 On the other hand, the learned Departmental Representative has relied upon the authorities below and submitted that all the objections raised by the assessee have already been dealt with by the authorities below.

17.3 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been examined by this Tribunal in the case of M/s. Flextronics Technologies India P.

Ltd. (supra) in para 8.2.1 as under :

“ 8.2.1 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that HCL Comnet System & Services Ltd.(seg.) is following its accounting year from 1st July to 30th June. For the year under consideration, the financial accounts are prepared for the year ended on 30th June, 2007. Therefore, it is clear that for the financial year under consideration, only partial data are available from 1st July 2006 to 31st March 2007. At the outset, we note that an identical issue has been considered by this Tribunal in a series of decisions as relied upon by the assessee and referred (supra). In the case of Sandstone Capital Advisors Pvt. Ltd. vs. ACIT (supra), the Tribunal vide its order dated 6/2/2013 held in para.10 to 10.3 as under: “10. We have considered the rival submissions and relevant material on record. The TPO has rejected this comparable because the financial data for the Financial Year 2007- 08 were not available in the public domain and hence, if was held that this company is not a suitable comparable. There is no dispute that the data furnished by the assessee are regarding the financial results as on 30.6.2007. Therefore, as far as the financial year 2007-08 is concerned, the data available were only for 3 months. 10.1 As per Rule 10B(4), the data to be used in analysing the comparability of or uncontrolled transaction with an international transaction shall be the data relating to the financial year in which 27 IT(T.P) A No.1359/Bang/2011 the international transaction has been entered into. Therefore, it is mandatory for the purpose of comparing the data of an uncontrolled transaction with an international transaction that the same should relating to the financial year in which the international transaction has been entered into. The information, data and documents should be contemporaneous. 10.2 Undisputedly, the final accounts of Arix Consultants Pvt Ltd are prepared on 30th June; therefore, the objection raised by the TRO has merits. The Rune Benches of the Tribunal in the case of Honeywell Automation India Ltd in vide order dated 10", Feb 2009 has also taken a similar view. 10.3 Apart from this, as it has been fairly conceded by the Ld Sr counsel for the assessee that there are related party transaction in the case of Arix Consultants Pvt Ltd as it is evident from the note on account at page 89 of the paper book. Therefore, in view of the tact that this company is having related party transactions, the same cannot be considered as a proper comparable. ”

We further note that a similar view has been taken in all other decisions as relied upon by the Tribunal in the case of ACIT vs. Loyal Groth services (supra) the Tribunal vide its order dated 26/02/2013 has held in para.7.2 as under: “7.2 The learned Departmental Representative contended the financial year end of a comparable case matches with assessee, it cannot be considered as comparable because of different financial year endings are distorted. He relied passed by the Mumbai Bench of the Tribunal in the case 01 Capital Advisors Private Limited v. AC'IT in ITA No 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule IOB(4) and an another case the Tribunal in Honeywell Automation India Lid, has mandatory for the purposes of comparing the data of m wpm transaction with an international transaction that the - to the financial year ending similar to that of the assessee The ld.DR contended that since the case of CMC Limited financial year ending vis-a-vis that of the assessee, have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by this regard was not seriously challenged by the id. AR. following the precedent, we hold that this case should from the list of comparables.”

Accordingly, by following series of decisions of the Tribunal on the point, we hold that this company cannot be treated as a good comparable for the purpose of 28 IT(T.P) A No.1359/Bang/2011 determining the ALP. Hence, the AO/TPO is directed to exclude this company from the list of comparable for the purpose of determination of ALP.”

No contrary view of the decision has been brought to our notice. Accordingly, following the earlier year decision of this Tribunal we direct the A.O/TPO to exclude this company from the list of comparables for the purpose of determining the ALP.

18.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in collecting and analysing data on financial fundamentals, corporate governance, Director / Executive compensation and capital market. The business promotion expenses of this company is 14.94% of the total operating revenue. Therefore this company cannot be considered functionally comparable with the assessee. He has further pointed out that this company has low employee cost at 22.69% and it fails the employee cost filter generally applied at 25%. He has relied upon the decision in the case of First Advantage Offshore Services Pvt. Ltd. Vs. DCIT (supra).

18.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that 29 IT(T.P) A No.1359/Bang/2011 predominant activity of this company is ITES and even the assessee in its TP study has not gone into the verticals of the comparables.

18.3 We have considered the rival submissions as well as the relevant material on record. We find that the functional comparability of this company has been examined by this Tribunal in the series of cases. In all those cases, this company was rejected as a comparable on the ground of low employee cost.

However, we note that in those cases, the Assessing Officer himself has applied the employee cost filter at 25% and this company is having employee cost of 22.69%. However, in the case of the assessee as we have discussed in the foregoing paras neither the assessee nor the TPO has applied any employee cost filter. While deciding the additioal ground we have set aside this issue to the record of the TPO/A.O to apply an appropriate employee cost filter.

Accordingly, the comparability of this company has been set aside to the record of the TPO/A.O for reconsideration and adjudication.

19.1 The learned Authorised Representative of the assessee has submitted that this company is a market leader in the field and also having a huge brand value and high intangibles. Thus the company enjoys the benefit of brand value

30 IT(T.P) A No.1359/Bang/2011 as well as intangibles. Further this company incurred a significant marketing expenses of 6.39% of sales. Thus having a giant as well as high turnover apart from other advantages of brand value intangibles and Intellectual Property Rights, this company cannot be compared with the assessee being captive BPO.

He has relied upon the decision of this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra).

19.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below.

19.3 Having considered the rival submissions as well as the relevant material on record, we note that the functional comparability of this company has been examined by this Tribunal in a series of decisions. The Hon'ble Delhi High Court in the case of Agnity India Ltd (supra) has upheld the findings of the Tribunal that this company cannot be compared with captive services provider. In the case of M/s. Flextronics Technologies India Pvt. Ltd. (supra), the Tribunal has held in para 8.3.1 as under : “ 8.3.1 We have considered the rival submissions as well as relevant material on record. We note that in para 16.2.15 of the Annual Report of this company, it has been reported that there was amalgamation w.e.f 1/4/2008. The relevant part of the information provided in the Annual Report reads as under: Amalgamation of PAN Financial Services India Private Limited

31 IT(T.P) A No.1359/Bang/2011 The Board of Directors in their meeting held on October 6. 2008. approved, subject to the approval of the Honorable High Courts of Karnataka and Chennai, a Scheme of amalgamation ("the Scheme") to amalgamate PAN Financial Services India Private Limited (-PAN Financial"), a wholly owned subsidiary of the Company engaged in providing business process management of services, with the Company with effect from April 1. 2008 ("effective date"). The approval of the High Court was received on April 6, 2009 and filed with the respective Registrar of Companies of Karnataka and Tamilnadu on April 6, 2009 and March 10, 2009 respectively. Accordingly on the scheme becoming effective, the financial statement of PAN Financial has been merged with the company. It is clear that there was extraordinary event of amalgamation during the year under consideration. Therefore, in view of the extraordinary development of amalgamation of another company, this company cannot be considered as a good comparable for the assessment year under consideration. Apart from this, we further note that as per the segment reporting in para.16.2.21 of Annual Report this company is providing business process management services as under: Segment reporting The company's operations primarily relate to providing business process management services to organizations that outsource their business processes. Accordingly. revenues represented along industry classes comprise the primary basis of segmental information set out in these financial statements. Secondary segmental reporting is performed on the basis of the geographical location of customers. The accounting principles consistently used in the preparation of the financial statements are also consistently applied to record income in individual segments. These are set out in the note on significant accounting policies. Thus it is clear that the revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO but it provides service to BPOs and that too management service to BPO. Therefore, in our considered view, this company is engaged in a different nature of activity to that of the assessee provided to its AE. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables.”

32 IT(T.P) A No.1359/Bang/2011 Thus it is clear that this company is having revenue from software products and also enjoy the benefit of huge intangible asset apart from brand value and leader in the market. Accordingly, by following the earlier order of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables.

20.2 On the other hand, the learned Departmental Representative has submitted that when the TPO has obtained the complete information / data of this company and found that this company is functionally comparable with the 33 IT(T.P) A No.1359/Bang/2011 assessee then mainly because the assessee was not having the information would not render this company non-comparable. He has relied upon the orders of the authorities below.

20.3 We have considered the rival submissions as well as the relevant material on record. We note that this Tribunal has taken a view that if the TPO has used the information obtained under Section 133(6) of the Act withut giving an opportunity to the assessee to counter the same then the decision of the TPO to include in the list of comparables is not sustainable. In the recent decision in the case of M/s. Pole To Win India Pvt. Ltd. (supra) dt.8.6.2016, both of us party to the same have considered an identical issue in para 11.3 as under :

“ 11.3 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the TPO in para 33.18 of the impugned order has stated that the Annual Report was not available for the year under consideration. Thus the notice under Section 133(6) was issued to the company. The company made available its Annual Report to the TPO and on the basis of the information received under Section 133(6), the TPO has concluded that this company is comparable with the assessee. The co-ordinate bench of this Tribunal in the case of e4e Business Solutions India Pvt. Ltd. (supra) has considered this issue in para 30 as under : “ 30. The assessee has not raised any specific ground on adopting this company as a comparable before the DRP. Before us, the learned counsel for the assessee has submitted that the TPO did not furnish the information obtained from this company in exercise of his powers u/s.133(6) of the Act. It was further pointed out that even as per the TPO, the annual report of this company for F. Y. 2006-07 was not available. The TPO has gone by the data available on capita line data base. The learned counsel for the assessee therefore made a prayer that the question of considering the aforesaid company as a comparable should be remanded back to the TPO / Assessing Officer for fresh consideration and the issue decided in the light of the published annual report for F. Y. 2006-07 and also on the basis of the information furnished by this company to the Assessing Officer in response to 34 IT(T.P) A No.1359/Bang/2011 notice u/s.133(6) of the Act. We have considered the submissions and are of the view that the same deserves to be accepted. The TPO / Assessing Officer will obtain the annual report of the company for F. Y. 2006-07 and also furnish the assessee copies of the same together with the information obtained by the TPO pursuant to issue of notice u/s.133(6) of the Act. The assessee will thereafter furnish its reply as to why this company should not be considered as a comparable company. The TPO / Assessing Officer will thereafter decide the question of considering this company as a comparable company after affording opportunity of being heard to the assessee.”

Thus the Tribunal has observed that the TPO/A.O has to furnish the copies of the information to the assessee and thereafter the assessee has to furnish its reply as to why this company should not be considered as a comparable company. In view of the order of the co-ordinate bench, we set aside this issue to the record of the A.O./TPO for deciding the comparability of the same after considering the reply of the assessee on furnishing of the information received under Section 133(6) of the Act.”

We do agree with the earlier view taken by the Tribunal and accordingly we set aside this issue to the record of the A.O/TPO for deciding the comparability of this company after considering the reply of the assessee on furnishing of the information received under Section 133(6) of the Act.

21.2 On the other hand, the learned Departmental Representative has submitted that this company is in the ITES segment and it is irrelevant whether the ITES provided in the voice out bound and voice in bound in the data sector.

The incident of indictment of Director took place more than two decades ago therefore the same cannot be a relevant factor for the Assessment Year under consideration. He has relied upon the orders of the authorities below.

21.3 We have considered the rival submissions as well as the relevant material on record. The assessee has raised objection regarding the functional comparability of this company as well as some extra ordinary event of merger and involvement of Director in some fraud activity. As far as the indictment of the Director is concerned, we are of the view that when the said incident was not in relation to the business of this Company but some other independent business of the Director and that too in long past therefore, the alleged involvement of Director in such activity would not be a relevant factor to doubt the credibility of financials of this company for the year under consideration.

Even otherwise apart from the allegation on the Director for some fraudulent

36 IT(T.P) A No.1359/Bang/2011 business activity not connected with this company there is nothing on record to suggest that the said act of the Director in long past has impacted the financials of this company during the year under consideration. Therefore, we do not find any substance in the objections raised by the assessee. As regards the extra-ordinary event of merger and functional dissimilarity, it is pertinent to note that this issue has not been examined by the authorities below and particularly the fact of the merger during the year. Accordingly, we set aside the examination of the fact of extra-ordinary event of merger as well as the functional dissimilarity to the record of the A.O/TPO for fresh consideration.

37 IT(T.P) A No.1359/Bang/2011 be compared with the assessee. He has relied upon the decision of this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra).

22.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below.

22.3 We have considered the rival submissions as well as the relevant material on record. Though this company is having very low revenue from ITES at 12.93% and further very low employee cost at 7.93% however, the functional comparability of this company was examined by this Tribual in the case of Flextronics Technologies India P. Ltd. (supra) in para 8.5.3 as under :

“ 8.5.3 We have considered the rival submissions as well as the material on record. At the outset, we note that functional analysis of the Co. has been examined by the Special Bench in case of M/s Maersk Global India Pvt.Ltd(Supra) in para-81 & 83 as under: “81. Insofar as the case of M/s Mold Tek Technologies Ltd is concerned, it is observed from the annual report of the said company for the FY: 2007-08 placed at pp.139 to 151 of the paper book that he said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further, information of M/s Mold Tek Technologies Ltd available on their website is furnished in the form of printout at pp.158 to 165 of the paper book and a perusal of the same shown that it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development cost of civil, structural, mechanical and plant design by 30-40 percent and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble 38 IT(T.P) A No.1359/Bang/2011 shooting facilities. M/s Mold Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of M/s Mold Tek as well as on its website, we are of the view that the said company is mainly involved in providing high end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low end services. It may be pertinent to note here that the financial year 2007-08 was a unique ear for Mold Tek Tech.Ltd. as the scheme of arrangement involving amalgamation between Tekmen Tool (P)Ltd and Mold Tek Tech.Ltd. and demerger between Mold Tek Technologies Ltd., simultaneously, was sanctioned by the Hon’ble Andhra Pradesh High Court by 15th July, 2008 with the appointed date for amalgamation and demerger being as October, 2007 and April 2007 respectively. It is also pertinent to note that while working out the operating margin of the said company provision for derivative loss of Rs.6.43 Crores made by Mold Tek Tech.Ltd. was excluded by the AO treating the same as non-operating expenses whereas in the case of Rusabh Diamonds Vs Asst.CIT(reported at (2013) 155 TTJ (Mum.) 386 (2013) 89 DTR (Mum.)(Trib.) 57 Ed) it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit.

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

39 IT(T.P) A No.1359/Bang/2011 23. Spanco Limited.

23.1 The learned Authorised Representative of the assessee has submitted that this company fails the ITES filter of 75% as it earns only 8.21% from ITES segment. He has further contended that the employee cost of this company is very low at 7.16% and there is an extra-ordinary event of demerger of this division during the year under consideration. The learned A.R. has pointed out that the co-ordinate bench of this Tribunal in the case of AOL Online India Pvt. Ltd. (supra) has held that this company cannot be considered as a good comparable with the assessee.

23.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below.

23.3 We have considered the rival submissions as well as the relevant material on record. We note that the Tribunal in the case of AOL Online India Pvt. Ltd. (supra) has considered the comparability of this company at para 6.3 on pages 17 & 18 as under :

“ Spanco Ltd (Sr. No. 22): The objections of assessee is about functionality of the above comparable. It fails employee cost filter, adopted by the TPO in IT segment but not in ITeS segment. It was submitted that employee cost of 7.20% of sales which indicate outsourcing of services. Moreover, the companies involved in telecom business, BPO services. It was submitted that principle of employee cost filter was upheld in Co-ordinate Bench decision in the case of First Advantage Offshore Services P. Ltd., Vs. DCIT in ITA No. 1086/Bang/2011. Considering that 40 IT(T.P) A No.1359/Bang/2011 assessee is also having BPO services and employee cost is very less when compared to similar businesses. We are of the opinionthat this comparable canbe excluded from the list of comparables.”

Since the employee cost is only 7.16% and further the revenue form ITES is only 8.21% therefore by any yardstick this company cannot be considered as functionally comparable having a different business model of low employee cost and low revenue from the ITES segment. Accordingly, we direct the A.O./TPO to verify the alleged fact and if it is found correct, this company shall be excluded from the list of comparables.

24.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in providing voice out bound, voice in bound data services. There is an extra ordinary event of amalgamation with Maple E- Solutions Ltd. He has also submitted that the financial results during the year of this company are unreliable as the Directors / owner of this company were in a serious indictment. Therefore, it is unsafe to take the result of this company for comparing the international transactions of the assessee. He has relied upon the decision of this Tribunal in the case of Flextronics Technologies India (P.) Ltd. (supra).

41 IT(T.P) A No.1359/Bang/2011 24.2 On the other hand, the learned Departmental Representative has submitted that this company is in the ITES segment and it is irrelevant whether the ITES provided in the voice out bound and voice in bound in the data sector.

The incident of indictment of Director took place more than two decades ago therefore, the same cannot be the relevant factor for the Assessment Year under consideration. He has relied upon the orders of the authorities below.

24.3 We have considered the rival submissions as well as the relevant material on record. The assessee has raised objection regarding the functional comparability of this company as well as some extra ordinary event of merger and involvement of Director in some fraud activity. As far as the indictment of the Director is concerned, we are of the view that when the said incident was not in relation to the business of this Company but some other independent business of the Director and that too in long past therefore the alleged involvement of Director in such activity would not be a relevant factor to doubt the credibility of financials of this company for the year under consideration.

Even otherwise apart from the allegation on the Director for some fraud business activity not connected with this company there is nothing on record to suggest that the said act of the Director in long past has impacted the financials

42 IT(T.P) A No.1359/Bang/2011 of this company during the year under consideration. Therefore we do not find any substance in the objections raised by the assessee. As regards the extra- ordinary event of merger and functional dissimilarity, it is pertinent to note that this issue has not been examined by the authorities below and particularly the fact of the merger during the year. Accordingly, we set aside the examination of the fact of extra-ordinary event of merger as well as the functional dissimilarity to the record of the A.O/TPO for fresh consideration.

25.1 The learned Authorised Representative of the assessee has submitted that this company has very low employee cost of 2.3%. Further this company is engaged in providing solution to the print industry with service like e- publishing, e-book print on demand, data and document management, data conversion, etc. He has further contended that this company outsource to out vendors. He has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra).

25.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below.

43 IT(T.P) A No.1359/Bang/2011 25.3 We have considered the rival submissions as well as the relevant material on record. We note that the objections raised by the assessee before us have been considered by this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra) in para 8.7.1 as under :

8.7.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company with ITES providing service provider has been examined by the Tribunal in various cases as relied upon by the learned AR of the assessee. In the case of First Advantage Offshore Services Pvt. Ltd. (supra) it has been held in para.35 as under: “35. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be moretha425% of the total expenses, it cannot he said that the said filter is not applicable to ITES segment, where comparably less employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the IT1ES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP.

Similar view has been taken by the Tribunal in the other decisions. We further note that the Hon’ble High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has also decided this issue in favour of the assessee. Accordingly, we direct the AO to exclude this company from the list of comparable.”

Since the employee cost of this company is very low therefore by applying any yardstick on the employee cost in the information technology sector, this 44 IT(T.P) A No.1359/Bang/2011 company cannot be considered as a good comparable. Accordingly, by following the earlier decision of this Tribunal, we direct the A.O/TPO to exclude this company from the list of comparables.

26.1 The learned Authorised Representative of the assessee has submitted that this company is providing software services, mini computers / micro processors based systems, IT Enabled Services, Toilet Soaps, Lighting products, etc. The ITES revenue is only 7% of the total sales. It incurs R & D expenditure which constitutes 8.5% of the total revenue. It owns significant intangibles and has filed 13 patents during the year under consideration and as many as 11 patents in the pipe line. Thus the learned Authorised Representative has submitted that this company cannot be considered as a functionally comparable with the assessee. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Flextronics Technologies India P. Ltd. (supra).

26.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below.

45 IT(T.P) A No.1359/Bang/2011 26.3 Having considered the rival submissions as well as relevant material on record, we note that the comparability of this company has been examined by this Tribunal in a series of decisions. In the case of Flextronics Technologies India P. Ltd. (supra), the Tribunal has held in para 8.8.1 as under :

“ 8.8.1 We have considered the rival submissions and relevant material on record. At the outset, we note that an identical issue of comparability of this company has been examined by this Tribunal in the case of GXS India Technology Centre Pvt.Ltd in IT(TP)A No.1444(Bang) 2012 dated 31/07/2015 wherein it has been held in paras.17.2 and 17.3 as under:

“17.2 We have considered the rival submissions and relevant material on record. We note that in case of 3DPLM Software Solutions Ltd, (Supra), this Tribunal has considered the functional comparability of this company in para-12.4.1 and 12.4.2 as under;

“12.4.1 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.

12.4.2 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

46 IT(T.P) A No.1359/Bang/2011 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 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. 17.3 As it was found that this company owns Intellectual Property Rights in the form of registered patents and several pending applications for grant of patents. Therefore, the said company owning intangibles cannot be compared to low risk captive services provider. Following the finding of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables.”

Accordingly, we direct the AO/TPO to re-compute the ALP after exclusion of the above companies from the list of comparables. The assessee claims that mean margin of the comparable after exclusion of the above comes to around 17.85% which is within tolerance range of +/-5%. We direct the TPO to consider the claim of the assessee of granting the benefit of tolerance range +/-5% as raised in ground No.3 of the concise grounds.”

Following the orders of earlier years of this Tribunal, we direct the A.O/TPO to exclude this company from the list of comparables.

27.1 The learned Authorised Representative of the assessee has submitted that the employee cost is only 1.16% which shows that this company outsources business to outside vendors. and also provides software development services and further the complete data of this company are not 47 IT(T.P) A No.1359/Bang/2011 available in the public domain. The TPO has used the information obtained under Section 133(6) without sharing with the assessee. He has relied upon the decision of the co-ordinate bench of this Tribunal in the case of AOL Online India Pvt. Ltd. (supra).

27.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below.

27.3 We have considered the rival submissions as well as the relevant material on record. The assessee has pointed out certain crucial facts of low employee cost at 1.61% as well as outsourcing of the business to the outside vendor, therefore, these facts are found to be correct and this company cannot be considered as good comparable. Further, the learned Authorised Representative has also pointed out that this company provides software development services and the financial details obtained under Section 133(6) of the Act has been used by the TPO without sharing with the assessee to reply/counter the same. Having considered the peculiar facts as pointed out by the learned Authorised Representative, we find that if these facts are found to be correct on verification then this company shall be excluded from the list of comparables. Accordingly we set aside this issue of comparability of this 48 IT(T.P) A No.1359/Bang/2011 company to the record of the Assessing Officer / TPO for verification of the facts as pointed out before us as well as to provide the information collected by the TPO under Section 133(6) and then decide the comparability of this company after considering the reply of the assessee.

The learned Departmental Representative has raised no objection. Accordingly, the Ground No.6 is dismissed being not pressed.

49 IT(T.P) A No.1359/Bang/2011 30.1 We have heard the rival submission and perused the material on record. The Hon’ble Karnataka 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 jurisdictional High Court reads as follows:-

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

……..In section 10A, not only the word ‘total turnover’ is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section 50 IT(T.P) A No.1359/Bang/2011 which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A

51 IT(T.P) A No.1359/Bang/2011 when the principle underlying both these provisions is one and the same”. 30.2 The Hon’ble Mumbai High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd. 330 ITR 175, in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon’ble Mumbai High Court reads as follows:-

“The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression “export turnover” in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and 52 IT(T.P) A No.1359/Bang/2011 insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression “total turnover” has not been defined at all by Parliament for the purposes of s.10A. However, the expression “export turnover” has been defined. The definition of “export turnover” excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression “export turnover” cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. ‘export turnover’ would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from ‘export turnover’ for the purposes of the numerator would be brought in as part of the ‘export turnover’ when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary – CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on”

53 IT(T.P) A No.1359/Bang/2011 30.3 In the light of the above binding precedents, we direct the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s 10A of the Act.

31.1 We have considered the rival submissions as well as the relevant material on record. We find that there is no reason to deny the carry forward of business loss therefore we direct the Assessing Officer to verify the claim and then decide the same as per law.