M/S E4E TECH SUPPORT (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.30.9.2011 passed

under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant

to the directions of the Dispute Resolution Panel (in short ‘DRP’) dt.29.9.2011 for the

Assessment Year 2007-08.

“ The lower authorities (the learned Assessing Officer, learned Transfer Pricing Officer and Honorable Dispute Resolution Panel) have erred in 1. Passing the Order which is bad in law.

2 IT(T.P) A No.1053/Bang/2011 2. passing the order disregarding the principles of natural justice. 3. making a reference to Transfer Pricing Officer for determining arm’s length price. 4. passing the order without demonstrating that appellant had motive of tax evasion. 5. Ignoring the fact that the members of Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the appellant, the constitution of the Dispute Resolution Panel is bad in law. 6. not appreciating that the charging or computation provision relating to income under the head “Profits & Gains of Business or Profession” do not refer to or include the amounts computed under Chapter X’ and therefore addition under Chapter X is bad in law. 7. adopting a flawed process of issuing notices u/s 133(6) and relying on the same without providing complete information and an opportunity to cross examine the companies concerned. 8. rejecting the comparables selected by the appellant and rejecting transfer pricing analysis of the appellant. 9. Performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis. 10. selecting inappropriate comparables. 11. rejecting comparables proposed by the appellant. 12. inappropriately computing the operating margins of comparables and the appellant. 13. Treating foreign exchange gain or loss and provision for bad debt as non-operating in nature. 14. not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies. 15. Not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justify the price paid/charged on the basis of any one comparable only. 16. not allowing the benefit of the +/-5% range mentioned in the proviso to section 92C (2). 17. calculating deduction under section 10A after setting off of the brought forward business losses and unabsorbed depreciation allowances of preceding assessment years; 18. levying a sum of Rs 22,32,010/- as interest under section 234B and a sum of Rs. 3,57,121 as interest under section 234D. The appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. The appellant prays accordingly.”

3 IT(T.P) A No.1053/Bang/2011 3. The assessee has also raised the additional grounds by filing petition for admission of

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

“ 1. The above referred appeal is in respect of the order passed by the learned Assessing Officer (AO). The Appellant filed objections to the draft Assessment Order of the Assessing Officer before the Honourable Dispute Resolution Panel (DRP). The DRP dismissed Appellant’s grounds relating to TP additions and confirmed the TP adjustment made in the draft Assessment Order. Subsequently, the AO passed Final Assessment Order. 2. In the order passed under section 143(3) r.w.s 144C, transfer pricing additions were made for transactions with associated enterprises to the total income of the Appellant. 3. The additional grounds of appeal (enclosed herewith) relates to: a) application of employee cost filter; and b) application of related party transaction filter at 15%; and c) rejection of Accentia Technologies Ltd (Seg.), Asit C Mehta Financial Services Limited, Bodhtree Consulting Ltd (Seg.) and Wipro Limited (Seg.) as comparables;

The TPO did not apply employee cost filter in the TP analysis conducted by him. Further, the TPO applied RPT filter of 25% for selection of comparables. The TPO has selected the above 4 companies as comparables in the order passed u/s 92CA. The Appellant had selected Wipro Ltd as a comparable in its TP study. With respect to application of filters, the ground pertains to question of law. With respect to rejection of a comparable, the ground pertains to question of law and facts. All the necessary facts for adjudicating this ground are already on record. The Appellant humbly prays that the additional grounds be admitted and adjudicated along with the other grounds of appeal in the course of hearing of the appeal. The Appellant prays accordingly.”

Representative on admission of the additional grounds. The learned Authorised

Representative of the assessee has submitted that though the assessee has challenged the

action of the A.O./TPO as well as the directions of the DRP in respect of the comparables

selected by the TPO/A.O. and consequently adjustments however in the light of various

decisions of this Tribunal, the assessee is raising these additional grounds. This does not

4 IT(T.P) A No.1053/Bang/2011 require any new fact or investigation of any fact for disposal of these grounds. In the

additional grounds the assessee is also seeking exclusion of Wipro Limited (Segmental)

though the said company was also selected by the assessee in its Transfer Pricing study

analysis. The learned Authorised Representative has relied upon the decision of the

Chandigarh Special Bench of this Tribunal in the case of DCIT Vs. Quark Systems Pvt. Ltd. 38

SOT 307 and submitted that the Special Bench has observed that even if the assessee or its

counsel has taken a particular company as comparable in its T.P. study, the assessee is

entitled to point out to the Tribunal that the said enterprise has wrongly been taken as

comparable if it was found that there is vast difference between the company taken as

comparable and the assessee. The learned Authorised Representative has relied upon the

decision of the Mumbai Bench of the Tribunal in the case of Prime International 31

Taxman.com 227 and submitted that by following the Special Bench decision in the case of

Quark Systems Pvt. Ltd. (supra), the Mumbai Bench has held that there can be no escape

from the proposition that the assessee is entitled to argue atleast before appellate authority

that a wrong stand was taken at the time of filing the return should be allowed to be

modified. He has also relied upon a series of other decisions of this Tribunal wherein the

Tribunal has taken a view that the assessee can raise objections against a comparable

selected in T.P. Study.

facts were not available on record at the time of T.P. proceedings and therefore the

objections raised by the assessee in the additional ground cannot be entertained at this

5 IT(T.P) A No.1053/Bang/2011 stage when the assessee did not raise these objections before the authorities below. The

learned Departmental Representative has further submitted that as regards the Related

Party filter of 15%, the assessee accepted the RP filter of 25% as applied by the TPO/A.O and

therefore the assessee cannot be allowed to change its stand at this stage. The employee

cost filter has already been applied by the TPO and therefore without pointing out any

specific fault, a vague objection cannot be considered at this stage. He has objected to the

admission of the additional ground raised by the assessee.

By way of the additional grounds, the assessee is raising objection regarding the application

of employee cost filter of 25% of the total cost, application of RP filter at 15% instead of 25%

applied by the TPO and exclusion of four comparable companies which was considered by

the TPO/A.O for determining the Arm’s Length Price (‘ALP’) As regards the objection raised

by the learned Departmental Representative that Wipro Ltd. (Seg.) was selected by the

assessee in its T.P. Study, we are of the view that the assessee cannot be precluded from

raising an objection against a company which is found to be not comparable even if the said

company was wrongly selected by the assessee in its T.P. Study. This view was taken by the

Special Bench of the ITAT, Chandigarh in the case of Quark Systems Pvt. Ltd.(supra) in paras

30 and 38 as under : “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

6 IT(T.P) A No.1053/Bang/2011 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 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.”

We note that the comparability of this company i.e. Wipro Ltd. (Seg.) has been examined by

this Tribunal in a series of decisions and therefore when no fresh evidence, record or fact are

required to be investigated then there is no bar in admitting the additional ground for

adjudication of the issue of functional comparability of this company. Similarly, other three

companies namely Accentia Technology Ltd. (Seg.), Asif C Mehta and Bodhtree Consultancy

Ltd. (Seg.) the assessee has raised additional ground in view of the fact that the functional

comparability of these companies have been examined by this Tribunal in a number of cases

and on the basis of the finding of this Tribunal the assessee made out a good prima facie case

for raising this objection against the inclusion of these companies in the set of comparables

7 IT(T.P) A No.1053/Bang/2011 selected by the TPO/A.O. Therefore, we find that when the assessee is raising the objection

in respect of other companies selected by the TPO on the basis of the record available as well

as in the light of various decisions of this Tribunal then the additional grounds raised

regarding the functional comparability of these companies can be admitted for deciding the

issue on merits along with other companies selected by the TPO and challenged by the

assessee in the appeal before us. As regards the application of RP filter at 15%, we find that

this Tribunal has been taking a consistent view on the tolerance range of the RP Transactions

in case of the comparable selected for determining the ALP. In a case when there is

sufficient number of comparables available then the RPT should be minimum so that the

unrelated and uncontrolled price is free from any RP Transactions. However, it is not

feasible in the real words to have the comparable entities without RPT. Accordingly, the

Tribunal has taken a consistent view that in normal circumstances when there is no difficulty

in selecting the comparables, the RPT filter shall not exceed 15% of the total sale/revenue.

In the case in hand, the TPO has applied 25% filter of RPT which is the extreme limit which

can be considered only when the comparables are not available and therefore the tolerance

range of the RPT can be taken maximum to 25%. Since in this case the TPO has already

taken into account 27 companies while determining the ALP therefore it is not an

exceptional case where there is a difficulty of selecting the comparable companies and

therefore we find that in the case of the assessee, the comparable company shall not have

more than 15% of RPT. In view of the above discussion, we admit the additional ground

raised by the assessee.

8 IT(T.P) A No.1053/Bang/2011 7. Ground Nos.9 to 16 are regarding Transfer Pricing Adjustment.

7.1 The assessee is a company and 100% subsidiary of Vinciti Networks Inc. USA. The

business profile of the assessee is recorded by the TPO in para 2.2 as under :

“ e4e India renders infrastructure management and technical support services, testing services to Vinciti Inc. and iCelerate Inc. USA.

Description Amount (Rs.) Operating Revenue 19,82,17,873 Operating Expenses 17,55,53,439 Operating Profit 2,26,64,434 Operating Profit to Expenses 12.91%”

7.2 The assessee has reported its international transactions as under :-

Nature of International transactions Amount (Rs.) Income from network admn. And technical support services. 16,80,79,426 Total amount of International transactions 16,80,79,426

Description IT Enabled Services (Rs.) Revenue 16,80,79,426 Operating Expenses 14,69,64,800 Operating Profit 2,11,14,626 Operating Profit onCost 14.36%

Thus it is clear that the dispute is only with respect to the ITES provided by the assessee to

its Associated Enterprises (AEs) have operating profit cost at 14.36%. To bench mark its

international transactions, the assessee has selected 17 companies. The TPO rejected the

T.P. Analysis of the assessee and also rejected the 12 companies out of 17 selected by the

assessee. Thus the TPO accepted five companies selected by the assessee in its T.P. Study

9 IT(T.P) A No.1053/Bang/2011 and after carrying out a fresh search added 20 more companies in the set of comparables.

Subsequently the TPO has added 2 more companies and finally the TPO has considered 27

companies for determining the ALP as under :

1 Accentia Technologies Ltd (Seg.) 30.61% 27.38% 2 Aditya Birla Minacs Worldwide Ltd 11.98% 12.45% 3 Allsec Technologies Ltd 27.31% 26.94% 4 Apex Knowledge Solutions Ltd 12.83% 14.44% 5 Apollo Healthstreet Ltd -13.55% -12.90% 6 Asit C Mehta Financial Services Limited 24.21% 24.05% 7 Bodhtree Consulting Ltd (Seg.) 29.58% 30.78% 8 Caliber Point Business Solutions Ltd 21.26% 21.50% 9 Cosmic Global Limited 12.40% 12.78% 10 Datamatics Financial Services Limited (Seg.) 5.07% 5.79% 11 Eclerx Services Ltd 89.33% 86.67% 12 Flextronics Software Systems Ltd (Seg.) 8.62% 7.55% 13 Genesys International Corporation Limited 13.35% 10.00% HCL Comnet Systems & Services Ltd (Seg.) 14 44.99% 45.10% 15 ICRATechno Analytics ltd (Seg.) [, ' 12.24% 12.84% 16 Informed Technologies India Ltd 35.56% 35.95% 17 Infosys BPOLtd 28.78% 29.84% 18 lservices India Pvt Ltd 49.47% 49.57% 19 Maple eSolutions Ltd 34.05% 31.43% 20 Mold·tek Technologies Ltd (Seg.) 113.49% 115.48% 21 R Systems International Ltd (Seg.) 20.18% 19.64% 22 Spanco Ltd (Seg.) 25.81% 20.97% 23 Triton Corp Limited 34.93% 28.86% 24 Vishallnformation Technologies Ltd 51.19% 43.37% 25 Wipro Ltd (Seg.) 29.70% 31.36% 26 Nittany Outsourcing Services Pvt Ltd 11.50% 11.94% 27 Accurate Data Converters Pvt Ltd 50.68% 49.13% Arithmetic Mean 30.21% 29.37%

Thus the TPO has computed the arithmetic mean of the comparable companies at 30.021%

and after allowing the working capital adjustment at 0.84%, the adjusted mean margin is

10 IT(T.P) A No.1053/Bang/2011 calculated at 29.37%. Accordingly, the TPO proposed adjustment under Section 92CA of

Rs.1,81,59,768. The assessee challenged the action of the TPO’s draft order of the Assessing

Officer before the DRP but could not succeed.

7.3 Before us, the assessee is seeking exclusion of 13 companies inclusive of one company

which was selected by the assessee itself. The 13 companies rejected by the assessee are as

under :

Sl.No. Name of the Company 1. Accentia Technologies Ltd. (Seg.) 2. Apollo Healthstreet Ltd. 3. Asit C Mehta Financial Services. 4. Bodhtree Consulting Ltd. (Seg.) 5. Caliber Point Business Solutions Ltd. 6. Eclerx Services Ltd. 7. HCL Comnet Systems & Services Ltd. 8. Informed Technologies India Ltd. 9. Infosys BPO Ltd. 10. Mold-tek Technologies Ltd. (Seg.) 11. Vishal Information Technologies Ltd. 12. Wipro Ltd. (Seg.) 13. Accurate Data Converters Pvt. Ltd.

At the time of hearing, the learned Authorised Representative of the assessee has submitted

that an identical set of 27 comparables was involved in the case of M/s. Ariba Technologies

India Pvt. Ltd. Vs. ITO in ITA No.441/Bang/2012 for the same assessment year which has

been decided by this Tribunal vide order dt.2.2.2016. The learned Authorised Representative

has pointed out that the functional comparability of the majority of the companies has been

examined by the Tribunal in the said decision. Thus the learned Authorised Representative

has relied upon the decision of this Tribunal in the case of Ariba Technologies Pvt. Ltd.

11 IT(T.P) A No.1053/Bang/2011 (supra) so far as the functional comparability as well as the RPT filter at 15% should be

applied instead of 25%.

7.4 The learned Departmental Representative has submitted that the decision of this

Tribunal in the case of Ariba Technologies Pvt. Ltd. (supra) cannot be applied in toto in the

case of the assessee as the business profile of the assessee is not identical to that of Ariba

Technologies Pvt. Ltd. (supra). He has relied upon the orders of the authorities below and

submitted that the TPO has examined the functional comparability of these companies and

therefore these companies are found comparable with the assessee.

7.5 We have heard the ld. A.R. & ld. D.R. and considered carefully the relevant material on

record. We find that in the case of Ariba Technologies Pvt. Ltd. (supra), the TPO has selected

the same set of 27 comparable companies as in the case of the assessee before us. We

further note that in the case of the assessee, the TPO has accepted that the assessee is in the

ITES segment which was also accepted in the case of Ariba Technologies Ltd. (supra). We

further find that most of the comparable companies are required to be excluded by applying

the filter of RPT at 15%. Therefore, to the extent of the exclusion of the companies on the

ground of RPT filter. We need not go into the functional comparability of those companies.

The Tribunal while considering the same set of 27 comparables in the case of Ariba

Technologies Ltd. (supra) has given the finding in para 15 as under : “ 15. We shall deal with each and every comparable which has been challenged by the assessee and exclusion of some of the comparables has been challenged by the revenue one by one as under : (i) Accentia Technologies Limited : Inclusive of this company is in the list of comparables has not been contested by the assessee either before the TPO or before the CIT (Appeals) or even before this Tribunal. Therefore there is no dispute regarding the

12 IT(T.P) A No.1053/Bang/2011 comparability of this company for the purpose of ALP. Accordingly, no adjudication is required on this comparable. (ii) Aditya Birla : This company was part of T.P. analysis of the assessee and also selected by the TPO/A.O. The assessee did not contest the inclusion of this company 3in the list of comparables. However, the CIT (Appeals) excluded this company on the ground of 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 4.24% of RPT. (iii) Allsec Technologies Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) and even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 11.90% of RPT. (iv) Apex Knowledge Solution Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (v) Apollo Health Street Ltd. : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on turnover filter. We find that the RPT revenue of this company is 17.77%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (vi) Asit C Mehta Financial Services Ltd. : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on turnover filter. We find that the RPT revenue of this company is 15.76%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (vii) Bodhtree Consulting Ltd (Seg.) : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparable on the ground that there is extra-ordinary profit as well as extra-ordinary event in this company during the year under consideration. Further, the assessee also contended that the RPT revenue of this company is at 38.54% and therefore this company fails the RPT filter. The CIT (Appeals) retained this company in the list of comparables. Before us the learned Authorised Representative of the assessee has reiterated its contention and submitted that there is an extra-ordinary profit of this company during the year and further the RPT fails the filter applied by the TPO/A.O as well as CIT (Appeals). He has referred draft order dt.9.12.2010 and submitted that the A.O./TPO has reproduced the particulars regarding RPT which show that during the F.Y. 2006-07, relevant to the assessment year under consideration this company has RPT to the extent of 38.54% of revenue. Thus this company cannot be considered as uncontrolled comparable company. On the other hand, the learned Departmental Representative has submitted that the TPO/A.O as well as CIT (Appeals) examined the records of this company and did not find the objection raised by the assessee as acceptable. He has relied upon the orders of the authorities below.

13 IT(T.P) A No.1053/Bang/2011 We have considered the rival submissions as well as the relevant material on record. As regards the objection of the learned Authorised Representative that this company has reported abnormal profits during the year. We find that high profit margin alone cannot be a ground for inclusion or exclusion of any company / entity in the list of comparables. However, if the high profit margin is due to some abnormal circumstances or event, then, the said company/entity cannot be considered as good comparable due to the reason of abnormal event or circumstances resulting high profit margin. Therefore, in the absence of any abnormal/extraordinary event or circumstances leading to high profit margin this objection of the learned Authorised Representative is not acceptable and hence rejected. Even otherwise, the profit margin at 29.58% cannot be considered as an abnormal when the assessee itself has reported the margin at 19% which is modified to 18.66%. We further note that even in the case of Essential Technologies Ltd. the profit margin before working capital was considered at Rs.30.61% and the assessee has accepted the said companyas a good comparable. Therefore, this objection of the assessee is without any merit or substance and deserves rejection. As regards the RPT at 38.54%, we find that the assessee raised this objection before the TPO/A.O and it has not been specifically dealt with by the authorities below. Further, from the Annual Report of this company, we find that the objection raised by the assessee pertains to the advances given by this company to the Associated Enterpries (AEs) and reported that the same was taken as RPT. The advance to the AEs does not pertain to the ITES segment and further it is not a operational trading activity of the said company to be considered as RPT for the purpose of uncontrolled comparable price. Accordingly, we do not find any merit in the objections of the assessee, even on the ground of RPT. (viii) Caliber Paint Business Solutions : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparables on the ground that it has 23% revenue from RPT and further this compay is engaged in R&D activity and also functionally different. The CIT (Appeals) excluded this company on the ground of 0% RPT filter as this company was stated to have 13.69% RPT. Before us, the learned Authorised Representative of the assessee has submitted that this company fails the RPT filter of more than 15% as this company has shown/reported 23% RPT. Therefore, this company should be excluded from the list of comparables. On the other hand, the learned Departmental Representative has submitted that the CIT (Appeals) as well as the TPO/A.O has reported only 13.69% RPT and therefore this company does not fail the filter of 15% RPT. We have considered the rival submissions as well as the relevant material on record. We note that the TPO/A.O as well as the CIT (Appeals) has mentioned the RPT of this company at 13.69%. therefore the claim of having more than 15% RPT is disputed by the revenue. We further note that th erelevnat record has not been produced before us to show that the company has earned the revenue of more than 15% from RPT as claimed by the assessee as 23%. In the absence of relevant record, even the issue of functional comparability cannot be decided. Accordingly, in view of the facts and circumstances of the case when the relevant record has not been produced before us in support of the rival claims of the parties the comparability of this company is set aside to the record of the A.O./TPO for considering the objection of the assessee regarding RPT as well as functional dis-similarity on account of R&D activity as well as other functions of this company.

14 IT(T.P) A No.1053/Bang/2011 (ix) Caliber Point Business Solutions Ltd. (Seg.) : This company was part of the T.P. analysis of the assessee and also selected by the TPO/A.O. The CIT (Appeals) has also retained this company as a good comparable. The assessee did not object against this company. Accordingly, the comparability of this company is not in dispute before this Tribunal. (x) Datamatics Financial Services Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A), even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 7.88% RPT. (xi) Eclerx Services Ltd. : This company was included by the TPO in the list of comparable. The assessee objected to this company on the ground of functional dis- similarity. The CIT (Appeals) has excluded this company on the ground of RPT that this company is having only 9.12% RPT. Therefore in view of our finding on RPT filter, the comparability of this company has to be decided on basis of functional similarity or dis- similarity. The ld. AR submitted that this company is rendering services like engineering, designing services which requires highly skilled employees. Thus, this company cannot be selected as comparable because their functions are different. He has relied upon the decision of Special Bench of Mumbai Tribunal in the case of Maersk Global Centres (India ) (P) Ltd V/s ACIT 147 ITD 83 and submitted that this company is rendering highly skilled services and cannot be compared with the service of ITES and accordingly, this company should be deleted from the set of comparables On the other hand, the ld. DR has relied upon the orders of authorities below and submitted that the TPO has considered the functional comparability at the time of selecting this company . We have considered the rival submissions and relevant record. At the out set, we note that the comparability of M/s Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India ) (P) Ltd (supra) in para 82 and 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

15 IT(T.P) A No.1053/Bang/2011 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.

As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P) Ltd (supra), this company provides data analysis and data process solution and is recognised as experts in chosen market financial services, retail and manufacturing. It was found to have being providing complete business solutions. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the software development services. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables. (xii) Flextronics Software : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparable as it fails R&D filter and also having ITES segment. The CIT (Appeals) excluded this company by accepting the contention of the assessee on R&D filter as well as ITES segment. We have heard the learned Departmental Representative as well as learned Authorised Representative. Ld. D R has relied upon the order of the TPO/A.O and submitted that the TPO has examined the the functional similarity of this company. At the outset, we note that the functional comparability of this company has been examined by this Tribunal in a number of decisions. The learned Authorised Representative has relied upon the decision of the Hyderabad Benches of Tribunal Dt.27.11.2013 in case of DE Shaw India Software Pvt. Ltd. Vs. ACIT ITA No.2071/Hyd/2011 wherein the Tribunal has held in para 27 as under :- “27. Flextronics Software Ltd. and Thirdware Software Solutions Ltd. : The assessee has objected to these two companies to be treated as comparable mainly on the ground that both these companies are into product development. We find that in case of Intoto Software India Pvtg. Ltd. (supra) the co-ordinate bench of this Tribunal having found that these two companies are functionally different as they are into product development has directed excluding these companies for comparability analysis. Respectfully following the decision of the co-ordinate bench of this Tribunal incase of M/s. Intoto Software India Pvt. Ltd. (supra) we also direct the Assessing Officer / TPO to exclude both these companies.”

16 IT(T.P) A No.1053/Bang/2011 Thus it is found by the Tribunal in a series of decisions that this company is into product development which is not comparable with the assessee of pure ITES segment. Accordingly, we do not find any error or illegality in the order of the CIT (Appeals) in excluding this company. (xiii) Genesys International Corporation Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range this company having 5.84% RPT is restored back to the set of comparables. (xiv) HCL Comnet : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on RPT filter. We find that the RPT revenue of this company is 21.52%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (xv) I C R A Techno Analytics Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range this company having RPT at 1.85% is restored back to the set of comparables. (xvi) Informed Technologies Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on RPT filter. We find that the RPT revenue of this company is 15.93%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (xvii) Infosys BPO Ltd. : This company was selected by the TPO and included in the list of comparables. The assessee objected against inclusion of this company in the set of comparables before the CIT (Appeals) on the ground of functional dis-similarity. The CIT (Appeals) has excluded this company on the ground of 0% RPT filter. Before us, the learned Authorised Representative of the assessee has submitted that the assessee had opposed inclusion of this comparable before the TPO on the ground that this company has substantial intangible assets, profits earned predominantly due to brand value and has large focus on R&D apart from substantial selling and marketing expenses. This company has a finance BPO and there is no sub-segment in the ITES segment. The learned Authorised Representative has referred to the Annual Report of this company and submitted that this company has brands and intangibles having diversified operations at large scale. Further this company is engaged in the development of mixed products like Finacle. This company is carrying out a large scale R&D activities and therefore cannot be considered as a good comparable with the assessee. The learned Authorised Representative has relied upon the following decisions :-

CASES PERTAINING TO ASSTT. CASES PERTAINING TO OTHER YEAR : 2006 - 07 ASSTT. YEARS Cypress Semiconductor technology India Triology E –Business Software India Pvt.

17 IT(T.P) A No.1053/Bang/2011 Private Limited IT (TP) A No 1167/Bang Ltd vs. DCIT ITA No. 1054/BANG/2012 2010 (AY : 2007-08) Agnity India Technologies Pvt Ltd ITA No. 24/7customer.com vs DCIT (AY : 2004- 3856(Del ITAT)/2010 (AY 2006-07) 05) ITA No.227/Bang/2010 Agnity India Technologies P. Ltd. (ITA No. Adaptec India Private Limited (AY : 2007- 1204/2011)(Del HC) 08) ITA No. 1801/Hyd/09. Misys Software Solutions India Private Mercedes Benz R & D India Pvt. Ltd. (AY Limited – IT(TP) A No.1425/Bang/2010 – : 2007-08) ITA No. 1222/Bang/2011. Turnover Verisign Services India Private Limited CSR India Pvt. Ltd. (AY : 2007-08) IT(TP)A No 1404 bang 2010 – Turnover ITA No. 1119/Bang/2011, [2013] Thoughtworks Technologies Witness Systems Software India Pvt Ltd (India)Private Limited- IT(TP)A (AY : 2007-08) ITA No. 1366/Bang/2011. No.1326/Bang/2010 - Turnover FOR CASES INVOLVING JOINT OPERATION, LARGE INTANGIBLES, HIGH BRAND VALUE, RISK BEARING & HIGH PROFIT MARGIN CASES Agnity India Technologies Pvt Ltd ITA No. 3856(Del)/2010], ITAT Delhi" This ruling has been upheld by the High Court (ITA No. 1204/2011, dated July 2013). Scale of operation, brand value etc. NTT Data India Enterprise Application Services Pvt. Ltd. [ITA No. 1612/Hyd/2010.] Motorola India Electronics Private Limited vs. ACIT ITA No. 1274 & 1413/Bang/2008. Logica Pvt. Ltd. Vs ACIT (ITA No. 1129/Bang/2011 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and submitted that when this company is in the business of ITES then it is functionally comparable with that of the assessee. The assessee did not object the inclusion of this company in the list of comparables before the TPO. We have considered the rival submissions as well as the relevant material on record. The contention of the ld. A.R. of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the

18 IT(T.P) A No.1053/Bang/2011 Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75% of revenues from software development services.

19 IT(T.P) A No.1053/Bang/2011 Thus it was found that this company is functionally dis-similar to the ITES service provider company as it provides end to end solutions in technical consultancy, design, development, re-engineering, maintenance, system integration and implementation. This company also generates revenue from the software products and has huge intangible assets. In view of the above facts and circumstances as discussed above, this company is functionally not comparable with that of the assessee. Accordingly, we direct the A.O./TPO to exclude this company. A similar view has been taken by the co-ordinate benches of this Tribunal in the cases relied upon by the assessee and cited supra. (xviii) I Services India Ltd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (xix) Maple ESolutionsLtd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (xx) Mold Tek Technologies Ltd. (Seg.) : This company was selected by the TPO and included in the list of comparables. The assessee objected to the inclusion of this company in the list of comparables before the TPO as well as before the CIT (Appeals) on the ground of functional dissimilarity and super normal growth. The CIT (Appeals) has excluded this company form the list of comparables by applying 0% RPT as well as on functional dissimilarity. Before us, the learned Authorised Representative of the assessee has submitted that this company is into engineering services being in the nature of producing design, drawings, detailed structure of engineering drawings using 2D and 3D software. These services are high end in nature and cannot be compared with the software development services provided by the assessee. There is also super normal growth of 200% in this segment. In support of his contention, he has relied upon the following decisions :- CASES PERTAINING TO ASSTT. YEAR Market Tools Research Pvt. Ltd. (ITA No. 2066/Hyd/2011. Capital IQ Information Systems (India) Pvt Ltd. Knoah Solutions Pvt Ltd (ITA No.1407/Hyd/2013

20 IT(T.P) A No.1053/Bang/2011

On the other hand, the learned Departmental Representative has submitted that this company is in ITES and the CIT (Appeals) has excluded this company by holding that this company is a KPO and not a BPO. However, mere nomenclature of KPO and BPO cannot be a ground for inclusion or exclusion of a company in this list of comparables without examining the actual functions performed by the company. We have heard the rival submissions and the relevant material on record. We find that this company is providing highly technical and specialized engineering services. The functional comparability has been examined by the Special Bench of the Tribunal in the case of Maersk Globle Solution Vs. ACIT 147 ITD 83 and it was held that this company cannot be compared with an ordinary ITES. The assessee before us is providing only back office support to the parent company. Therefore, Mold-tek Technology is engaged in producing design, drawing and structural engineering drawings of 2D and 3D software cannot be compared with the assessee. Accordingly, we do not find any reason to interfere with the order of the CIT (Appeals) in treating this company functionally different. A similar view has been taken by the co-ordinate bench of this Tribunal in the case relied upon by the assessee. (xxi) R Systems International Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company having 0.58 % of RPT is restored back to the set of comparables. (xxii) Spanco Systems Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company having only 5.03% of RPT is restored back to the set of comparables. (xxiii) Triton Corp Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (xxiv) Vishal Information Technologies Ltd. : This company was selected by the TPO and included in the list of comparables. The assessee objected against the inclusion of this company in the list of comparables on the ground that it fails R&D filter as well as functional dissimilarity. The assessee has also contested the

21 IT(T.P) A No.1053/Bang/2011 inclusion of this company before the CIT (Appeals). However, the CIT (Appeals) has retained this company in the list of comparables. Before us, the learned Authorised Representative of the assessee has submitted that this company is functionally dissimilar to the assessee as this company is engaged in providing services by way of outsourcing services to the third party vendors. He has referred the relevant part of the Annual Report and submitted that the job work expenditure is significant which shows that this company is outsourcing the services to third party and therefore this company cannot be considered as a good comparable. The learned Authorised Representative has further pointed out that for the Assessment Year 2006-07, this Tribunal has held that this company cannot be considered as a good comparable. He has also relied upon the decisions as under : Zavata India Private Limited (ITA No. 1781/Hyd/2011, TS-156-ITAT-2013(HYD)-TP, ITAT Hyderabad) Capital IQ Information Systems (India) Pvt Ltd-ITA No 1961-AY 2007-08. Cognizant Technology Services Pvt. Ltd. [ITA Nos. 2106/Hyd/2011 (AY 2007-08) and 1864/Hyd/2012 (AY 2008-09), TS-140-ITAT-2013(HYD)-TP] Avineon India Pvt Ltd [ITA No. 1989/Hyd/2011, (TS- 308-ITAT-2013(Hyd)-TP)], ITAT Hyderabad) On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that as far as the functions of this company is concerned, it is very much similar to that of the assessee in providing ITES services. We have heard the rival submissions and the relevant material on record. We find that salary and wages expenditure of this company is very minimal at 2.3% of total revenue which shows that this company outsources the services to third parties. This fact is also reflected in the Annual Report and profit and loss account wherein the job work expenditure is substantial under the head ‘Data Entry Charges’ and vendor payment. Therefore, there is no dispute as regards the business model of this company is not different from the Assessment Year 2006-07 and 2007-08. Rather the outsourcing service charges are increased during the year to Rs.13,12,00,000 from Rs.11,49,00,000 in the earlier year. This Tribunal in the assessee's own case for Assessment Year 2006-07 has held in paras 24 to 25 as under : “ 24. We have considered the rival submissions. As far as comparable companies chosen by the TPO at S.No.1,3,6,7 & 8 viz., Maple ESolution Ltd., Datamatics Financial Services Ltd., Vishal Information Technological Services Ltd., Asit C.Mehta Financial Services Ltd., and Gold Stone Infratech Ltd., in the list of comparable companies chosen by the TPO, we find that the Hyderbad Bench of the ITAT in the case of HSBC Electronic

22 IT(T.P) A No.1053/Bang/2011 Data Processing India Ltd. Vs. ACIT, ITA No.1624/Hyd/2010 by order darted 28.6.2013 considered comparability of these companies in the case of a company engaged in rendering IT enabled services to its AE similar to that of the Assessee in the present case. The tribunal held that the aforesaid companies are not comparable. The following were the relevant observations of the Tribunal. "8. The first objection is with reference to selection of comparable data by the TPO with reference to the following five companies- (a) Vishal Information Technologies Ltd. (b) Goldstone Infratech Ltd. (c) Datamatic Financial Services Ltd.(seg) (d) Maple e-Solutions Ltd. (e) Nucleus Netsoft & GIS(India) Ltd. (now known as (Asit C. Mehta Financial Services Ltd.) Vishal Information Technologies Ltd. 9. The assessee’s objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee’s case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the out-sourcing cost was at 88.64% of the operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Maersk Global Services Centre (India) Pvt. Ltd. (14 ITR(Trib) 541) the Mumbai Bench of the Tribunal has analysed and rejected this company as comparable for the reason that it has outsourced a considerable portion of it’s business and is functionally different. Moreover, it was also submitted that the DRP in the later year of 2008-09 vide its order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technology Ltd.) was not a suitable comparable and needs to be dropped from the final set of comparables. Based on the above submissions, it was submitted that this company cannot be used as a comparable and has to be excluded.

23 IT(T.P) A No.1053/Bang/2011 9.1. The learned Departmental Representative, however relied on the orders of the TPO. 9.2. After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee’s own case in the later year, as can be seen from the copy of the order placed on record, for assessment year 2008-09. In view of this, we direct the Assessing Officer to exclude this company from the list of comparables. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 14. In view of the foregoing discussion, we agree with the assessee’s objection that the above five comparables should be excluded. 25. The facts and circumstances and the Assessment year for which the aforesaid companies were not considered as comparable are identical to the case decided by the Hyderbad Bench of ITAT and that of the case of the Assessee. Respectfully following the decision of the Hyderbad Bench of ITAT, we direct the TPO to exclude the aforesaid companies from the list of comparable while arriving at the arithmetic mean of comparable. The relevant grounds of appeal of the Assessee are allowed.” In view of the above facts as well as the decision of the Tribunal in assessee's own case for Assessment Year 2006-07, we direct the A.O/TPO to exclude this company form the list of comparables. (xxv) Wipro Limited (Seg.) : This company was selected by the TPO and included in the list of comparables. The assessee objected the inclusion of this company on the ground of functional dis-similarity. The CIT (Appeals) excluded this company on 0% RPT filter as well as functional dis-similarity. Before us, the learned Authorised Representative of the assessee submitted that this company cannot be compared with the assessee as it has made significant investment in the business acquisition. He has referred the relevant part of the Annual Report and submitted that this company has reported a huge investment in acquisition of the business. This company is also engaged in the business of

24 IT(T.P) A No.1053/Bang/2011 innovation, technology innovation, process innovation and delivery innovation. It also earns about 8% from innovation activity and also having more than 13 engineering patents, enterprises, business and quality. This company has 55 centres of excellence and 30 innovation products. It has also set up a handset mobile tested lab and engaged in R&D activity. Thus this company cannot be compared with the assessee. He has relied upon the following decisions : Market Tools Research Pvt. Ltd. (ITA No. 2066/Hyd/2011) Intoto Software India Pvt. Ltd. [ITA.No.1196/Hyd/2010 (AY 2005-06), ITA.No.1197/Hyd/2010 (AY 2005-06), ITA.No.2102/Hyd/2011 (AY 2007-08), TS-141- ITAT-2013(HYD)-TP, ITAT. On the other hand, learned Departmental Representative has submitted that when the TPO has considered ITES segment of this company than the other activity of this company are not relevant for determining the ALP. Thus he has submitted that this company is engaged in the similar activities and therefore is a good comparable. He has relied upon the order of the TPO. We have considered the rival submissions and the relevant material on record. Though the TPO has considered only segmental data relating to ITES services, however, there is no denial that this company is having significant investment in the business acquisition as well as engaged in the innovation activities of various fields including technology innovation, process innovation and delivery innovation. This company is also having a huge brand value and therefore has a bargaining power in comparison to the other companies who were engaged in the back office support services. This company is also maintaining 55 centres of excellence and 30 innovation projects. Therefore this company is also engaged in the R&D activities and getting the benefit of the innovation and R&D. In view of the above facts, this company cannot be treated as a good comparable for the assessee which is providing back office support services to its parent company without earning any benefit of the innovation and R&D. Accordingly, we do not find any reason to interfere with the finding of the CIT (Appeals) on functional dis-similarity of this company. (xxvi) Nittany Outsourcing Services Pvt. Ltd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue. (xxvii) Accurate Data Converters Ltd. : : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the

25 IT(T.P) A No.1053/Bang/2011 assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue.”

Thus it is clear that certain companies were found as not comparable are directed to be

excluded on functional dis-similarity, RPT as well as different business model or having extra-

ordinary event : (i) Apollo Healthstreet Ltd. (ii) Asit C Mehta Financial Services.

These two companies were found as not good comparables on the ground of RPT filter @

15%.

engaged in the business of development of software product and highly fluctuating margin,

this company is also functionally dis-similar to the assessee as it is engaged in providing open

and end-to-end web solution, software consultancy, design and development of solution by

using latest technology. This company is also engaged in the development of software

products. He has referred to the Annexure to the Directors Report and submitted that this

company is following the method of revenue recognition from software development based

on software developed and billed to client whereas the expenditure is recognized when it is

incurred towards software development. Therefore, there is no match between the

expenditure and the revenue from software development segment. Thus once this company

26 IT(T.P) A No.1053/Bang/2011 is in the software development, the same cannot be compared with the assessee being ITES

provided to its AEs.

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

orders of the authorities below and further submitted that the co-ordinate bench of this

Tribunal in the case of Ariba Technologies India Pvt. Ltd. Vs. ITO in IT(TP)A No.441 &

442/Bang/2012 Dt.2.2.2016 found this company to be comparable.

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 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.”

27 IT(T.P) A No.1053/Bang/2011 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.

We have considered the rival submissions and the relevant material on record. At the

outset, we note that the comparability of this company has been considered by the co-

ordinate bench of this Tribunal in the case of Ariba Technologies Pvt. Ltd. (supra). From the

finding of the co-ordinate bench it is clear that the comparability of this company was also

considered by the Special Bench of the Tribunal in the case of Maersk Global Centres (India)

Pvt. Ltd. Vs. ACIT (2014) 43 taxmann.com 100 (Mum-Trib.) (SB). Thus in view of the

decision of the co-ordinate bench, we find that this company is engaged in providing data

analysis and process solutions and recognized as expert in market financial services, retail

and manufacturing. Thus this company was providing complete business solutions which are

in different field of services. Therefore this company cannot be considered as comparable

28 IT(T.P) A No.1053/Bang/2011 with the low end service provider. Accordingly, we direct the A.O./TPO to exclude this

company from the list of comparables.

These companies were found to be having more than 15% RPT revenue. Accordingly, we

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

Technologies Pvt. Ltd. (supra), this company is deriving revenue from the software product

and has a huge intangible assets apart from the brand value and a leader in the market.

Accordingly, by following the earlier orders of this Tribunal, we direct the A.O./TPO to

exclude this company from the list of comparables.

11.1 I-services India Pvt. Ltd. : The learned Authorised Representative of the assessee has

submitted that the complete financial details are not available in the public domain in

respect of this company despite the TPO has selected this company for the purpose of

computing the ALP. He has pointed out that an identical issue has been considered by the

co-ordinate bench of this Tribunal in the case of sister concern of the assessee i.e. e4e

Business Solutions India Pvt. Ltd. Vs. DCIT in ITA No.819/Bang/2011 vide order dt.26.5.2015

wherein the Tribunal has remanded the issue to the record of the A.O./TPO. Thus the

learned Authorised Representative has submitted that the assessee be given the complete

financial information of this company for filing its objections and comments against the

comparability of this company.

29 IT(T.P) A No.1053/Bang/2011 11.2 On the other hand, the learned Departmental Representative has relied upon the

orders of the authorities below and submitted that the TPO has called the relevant

information under Section 133(6) of the Act. Thus the TPO has considered this company

after examination of the entire relevant record.

11.3 We have considered the rival submissions as well as the relevant material on record.

At the outset we note that the TPO in para 33.18 of the impugned order has stated that the

Annual Report was not available for the year under consideration. Thus the notice under

Section 133(6) was issued to the company. The company made available its Annual Report

to the TPO and on the basis of the information received under Section 133(6), the TPO has

concluded that this company is comparable with the assessee. The co-ordinate bench of this

Tribunal in the case of e4e Business Solutions India Pvt. Ltd. (supra) has considered this

issue in para 30 as under :

“ 30. The assessee has not raised any specific ground on adopting this company as a comparable before the DRP. Before us, the learned counsel for the assessee has submitted that the TPO did not furnish the information obtained from this company in exercise of his powers u/s.133(6) of the Act. It was further pointed out that even as per the TPO, the annual report of this company for F. Y. 2006-07 was not available. The TPO has gone by the data available on capita line data base. The learned counsel for the assessee therefore made a prayer that the question of considering the aforesaid company as a comparable should be remanded back to the TPO / Assessing Officer for fresh consideration and the issue decided in the light of the published annual report for F. Y. 2006-07 and also on the basis of the information furnished by this company to the Assessing Officer in response to notice u/s.133(6) of the Act. We have considered the submissions and are of the view that the same deserves to be accepted. The TPO / Assessing Officer will obtain the annual report of the company for F. Y. 2006-07 and also furnish the assessee copies of the same together with the information obtained by the TPO pursuant to issue of notice u/s.133(6) of the Act. The assessee will thereafter furnish its reply as to why this company should not be considered as a comparable company. The TPO / Assessing Officer will thereafter decide the question of considering this company as a comparable company after affording opportunity of being heard to the assessee.”

30 IT(T.P) A No.1053/Bang/2011 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.

12.1 Mold-tek Technology Ltd. (Seg.) : Having considered the rival submissions as well as

the relevant material on record, we find that the functional comparability has been

considered by this Tribunal in a series of decision including the decision of Special Bench in

the case of Maersk Global Centres (India) Pvt. Ltd. (supra). The co-ordinate bench of this

Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) has held that this company

is engaged in the engineering services being the nature of producing designs, drawings,

detailed structure of engineering drawings using 2D and 3D software cannot be compared

with the assessee and consequently the A.O./TPO is directed to exclude this company from

the set of comparables.

Accentia Technology Ltd. :

13.1 The learned Authorised Representative of the assessee has submitted that there is an

extra-ordinary event of amalgamation during the year under consideration as this company

has amalgamated its subsidiary namely Geo Soft Technologies Ltd. and Iridium Technologies

India Pvt. Ltd. w.e.f. 1.4.2006 as per the respective orders of the Hon'ble High Court. He has

further submitted that this fact has also been mentioned in the notes to accounts. Thus the

31 IT(T.P) A No.1053/Bang/2011 learned Authorised Representative has submitted that due to the extra-ordinary event

during the year under consideration, this company cannot be considered as good

comparable. The learned Authorised Representative has relied upon the decision

dt.29.4.2016 of Delhi Bench of ITAT in the case of Sony Mobile Communication Ltd. Vs. DDIT

in ITA No.769/Del/2014 in support of his contention.

13.2 On the other hand, the learned Departmental Representative has submitted that the

assessee has not raised this issue before the authorities below. Further it is not clear

whether the amalgamation of the subsidiaries has changed business profile of this company

from its stand alone. He has relied upon the orders of the authorities below.

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

32 IT(T.P) A No.1053/Bang/2011 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. 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.

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 has been examined by this

Tribunal in the case of Ariba Technologies Ltd. (supra) and it was found that this company

was out sourcing its job and therefore it fails the employee cost filter. Even otherwise when

this is getting its work done through-out sourcing then the business model of this company

33 IT(T.P) A No.1053/Bang/2011 is different from the assessee. Accordingly, we direct the A.O./TPO to exclude this company

from the list of comparables.

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 has been examined by this

Tribunal in the case of Ariba Technologies Ltd. (supra), it is clear from the finding of the co-

ordinate bench that this company is having significant investment in business acquisition as

well as engaged in the innovation activities of various fields including technology innovation,

there was innovation and delivery innovation. This company is also having huge brand value

and R&D activity. Therefore in view of the judgment of Hon'ble Delhi High Court in the case

of Agnity India Pvt. Ltd. 219 Taxman 26, this company cannot be considered as a good

comparable with a low end and captive service provider in ITES segment. Accordingly, we

direct the A.O./TPO to exclude this company form the list of comparables.

16.1 The learned Authorised Representative of the assessee has referred to the Directors

Report of this company and submitted that this company earns revenue from software

development as it is reported in the Directors Report.

16.2 On the other hand, the learned Departmental Representative has submitted that no

such objection was taken by the assessee before the authorities below and therefore the

assessee is bringing a new fact at this stage.

34 IT(T.P) A No.1053/Bang/2011 16.3 Having considered the rival submissions as well as the relevant material on record,

we note that this company was selected by the TPO and Annual Report as well as Directors

Report are the primary documents for analyzing functional comparability of a particular

company. Therefore, we do not find any substance in the objections raised by the D.R. We

note that in the Directors Report, the working of the company is reported as under :

“WORKING OF THE COMPANY

Income from software development during the year under review was Rs.4,33,46,996 as against Rs.431,71,568 for the year ended 31.3.2006. The net profit after taxes amounted to Rs.66,87,665 as against Rs.100,50,544 in the previous year.”

Thus it is clear that this company has earned income from software development during the

year under consideration and the composite data has been considered. In view of the above

facts brought to our notice, we set aside this issue to the record of the TPO/A.O for further

verification and examination of the relevant record and financial data of this company. We

make it clear that if this company is generating revenue from software development activity

which is part of the operating revenue / margins of this company considered for the purpose

of ALP then this company shall be excluded from the set of comparables.

comparability, some of the companies therefore after exclusion and reconsideration of the

companies as directed in this order, the ALP from the remaining comparable companies as

directed to be recomputed. Needless to say the benefit of second proviso to Section 92C(2)

of the Act also be considered.

35 IT(T.P) A No.1053/Bang/2011 18. Ground No.17 is regarding calculation of deduction under Section 10A after setting off

brought forward losses and unabsorbed depreciation.

18.1 The learned Authorised Representative of the assessee has submitted that this issue

is covered by the judgment of Hon'ble jurisdictional High Court in the case of CIT Vs.

Yokogawa India Ltd. (341 ITR 385). He has further submitted that in the recent decision of

Hon'ble jurisdictional High Court in the case of Wipro Limited reported in 382 ITR 179, the

Hon'ble jurisdictional High Court has again reiterated its view taken in the decision of

Yokogawa India Ltd. (supra). Even otherwise this issue was settled by the co-ordinate bench

in the assessee's own case for the Assessment Year 2006-07.

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

decision of the Interwoven Software Services India Pvt. Ltd. Vs. DCIT (2016) 67 taxman.com

361 (Bang-Trib).

17.3 Having considered the rival submissions as well as the relevant material on record,

we note that an identical issue has been considered by the co-ordinate bench of this Tribunal

in assessee's own case reported in 60 taxman.com 311 dt.23.7.2015 in para Nos.9.4.1 and

9.4.2 as under : “ 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Hon'ble Karnataka High Court in the case of Yokogawa India Ltd. (supra) has held as under :- 33. As the income of 10-A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot be set off against the income of 10-A unit u/s 72. The loss incurred by the assessee under the head profits and gains of business or profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee.

36 IT(T.P) A No.1053/Bang/2011 Therefore as the profits and gains under section 10-A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation u/s 32(2) is to be set off. As deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to be assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the revenue”. 9.4.2 The Hon'ble High Court of Karnataka in its aforesaid decision (supra), has held that deduction under Section 10A of the Act is to be given without setting off the unabsorbed brought forward losses. In the case on hand, the Assessing Officer has computed the eligible deduction under Section 10A of the Act after setting off brought forward unabsorbed business losses. Respectfully following the decision of the Hon'ble High Court of Karnataka in the case of Yokogawa India Ltd. (supra), we direct the Assessing Officer to allow the deduction under Section 10A of the Act without setting off the brought forward unabsorbed business loses. Consequently, Ground No.14 raised by the assessee is allowed.” We further note that the Hon'ble jurisdictional High Court in the case of Wipro Limited (supra) has again decided this issue in favour of the assessee and against the revenue. Accordingly, by following the binding precedent of the Hon'ble jurisdictional High Court, we decide this issue in favour of the assessee and direct the Assessing Officer to allow claim of deduction under Section 10A without setting off brought forward losses and unabsorbed depreciation.

37 IT(T.P) A No.1053/Bang/2011 18. Ground No.18 is regarding interest under Section 234B and 234D which is mandatory

and consequential in nature.

*Reddy gp

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

By Order

Asst. Registrar, ITAT, Bangalore