ELECTRONICS FOR IMAGES INDIA PVT,. LTD.,,BANGALORE vs. DCIT,

Per A.K. Garodia, Accountant Member These are cross appeals filed by the assessee and the Revenue which are directed against the order of ld. CIT (Appeals)-IV Bangalore dated 18.12.2012 for the assessment year 2008-09.

GROUNDS RELATING TO LEGAL ISSUES 1. The Order of the learned Commissioner of Income Tax (Appeals) - IV to the extent prejudicial to the appellant is bad in law.

2. The learned Assessing Officer has erred in making a reference to Transfer Pricing Officer for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming the action of the Assessing officer.

3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. Passing the Orders in the manner passed by them. The Orders being bad in law are liable to be quashed. b. passing the order without demonstrating that appellant had motive of tax evasion. c. 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 made under Chapter X is bad in law. d. adopting a flawed process for issuing notices u/s 133(6) and relying on the same without providing complete information or an opportunity to cross examine the companies concerned. GROUNDS ON COMPARABLES AND REJECTION OF TP ANALYSIS OF THE APPELLANT 4. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. computing the arm's length price based on the data for the Financial Year 2007-08 of the comparables, which was not available when the appellant undertook transfer pricing documentation and reporting obligations; b. rejecting the comparables selected by the appellant on unjustifiable grounds; c. rejecting the additional comparables proposed by the appellant on unjustifiable grounds; and IT(TP)A No.227 & 285/Bang/2013 Page 3 of 40 d. rejecting the transfer pricing analysis undertaken by the appellant on unjustifiable grounds. GROUNDS RELATING TO TP ANALYSIS OF THE TPO 5. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in: a. Performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis. b. adopting companies as comparables even though they are not comparable to the appellant. c. Inappropriately computing the operating margins of comparables and the appellant. d. 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. e. not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies, including the differences in functions performed, assets employed and risks undertaken.

6. The learned Commissioner of Income Tax (Appeals) - IV has erred in a. confirming companies selected by the TPO as comparables ignoring the submissions of the appellant. b. Not appropriately computing the working capital adjustment.

7. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in not allowing the benefit of the +/- 5% range prescribed in the proviso to section 92C(2).

8. The learned assessing officer has erred in levying interest under section 234B and 234D of the Income tax Act, 1961. On facts and in the circumstances of the case and law applicable, interest under section 234B and 234D is not leviable. The appellant denies its liability to pay interest under section 234B and 234D. PRAYER 9. On an overall consideration of the facts of the case, and the law applicable: a. the ALP as determined by the Transfer Pricing Officer, as adopted by the Assessing Officer and as confirmed by the CIT(A), to the extent

IT(TP)A No.227 & 285/Bang/2013 Page 4 of 40 prejudicial to the appellant, being not correct is to be quashed and the figures as determined and returned by the appellant being correct are to be accepted. b. Interest under section 234B and 234D be deleted. 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 appeals according to law.

The appellant prays accordingly.”

“1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.

2. The learned CIT(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding M/s. Flextronics Ltd., iGate Global Solutions Ltd., Infosys Technologies Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd. and Wipro Ltd. as comparables.

3. The learned CIT (A), on the facts and in the circumstances of the case, erred in holding that the company VGL Softech Ltd should be considered as a comparable in the case of the taxpayer when the taxpayer itself has not selected the company as an uncontrolled comparable. The learned CIT (A) erred in holding that M/s Avani Cincom 4. Technologies, cannot be taken as a comparable as segmental comparable without appreciating the fact that the company operates in only one segment.

5. The learned CIT (A) erred in holding that M/s. Celestial Biolabs Ltd being functionally different, cannot be taken as a comparable.

6. The learned CIT (A) erred in arriving at the conclusion that M/s. KALS Information Systems Ltd. had net margin on cost of 30.92% as against 41.94% computed by the TPO.

IT(TP)A No.227 & 285/Bang/2013 Page 5 of 40 7. The learned CIT (A) was not justified in directing that the final set of 11 companies retained by him should be considered as comparables for determination of the average margin of comparables.

8. The learned CIT (A) erred in not considering the entire set of TPOs comparables in toto.

9. The learned CIT (A) erred in not appreciating that a piecemeal approach negates the whole concept of comparability analysis.

10. The learned CIT (A) erred in not appreciating that any disturbance in any one of the criteria of the tax payer or the TPO results in fresh comparability analysis.

12. The CIT(A) erred in not appreciating that there is no provision in the Act which requires the concerned expenses which are required to be reduced from the export turnover as per clause (iv) of the Explanation to section 10A to be reduced from the total turnover.

13. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (A) be reversed and that of the Assessing Officer be restored.

14. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal.”

IT(TP)A No.227 & 285/Bang/2013 Page 6 of 40 comparables are excluded in the present case, the average arm’s length margin on the basis of remaining 8 comparables comes to 14.35% and after adjustment of working capital margin, it goes further down to 13.86% as against margin reported by assessee of 9.60% being operating profit/operating cost of the assessee and therefore, the same is within +/- 5% range and hence, no TP adjustment is called for u/s. 92CA of the Act.

“1. The lower authorities have erred in selecting Quintegra Solutions Ltd., E-Zest Solutions Ltd., Thirdware Solutions Ltd., and Lucid Software Ltd. as comparables despite them being functionally different from the Appellant.

3. The CIT (A) has erred in rejecting Indium Software Ltd. as a comparable on the ground it is loss making.”

IT(TP)A No.227 & 285/Bang/2013 Page 7 of 40 Ltd. having margin of (-) 2.30% is of academic interest only. In reply, the ld. AR of assessee had nothing to say.

9. Regarding ground No.6 raised by the Revenue, it is submitted by the ld. DR of the Revenue that the working of CIT (Appeals) regarding net margin of the comparable i.e., KALS Information Systems Ltd. at 30.92% as against 41.94% computed by the TPO is not correct. At this juncture, it was pointed out by the Bench that as per the Tribunal’s order in the case of Kodiak Networks India Pvt. Ltd. v.

DCIT (supra), when this comparable i.e., KALS Information Systems Ltd. has to be excluded, then the percentage of margin of that comparable is not relevant and the same is of academic interest only. In reply, the ld. DR of Revenue had nothing to say.

10. Regarding ground Nos. 11 & 12 of the Revenue’s appeal, it was submitted by the ld. DR of Revenue that lease line charges of Rs. 6,41,835 and foreign exchange loss of Rs. 45,97,211 attributable to delivery of the product or software outside India should not be excluded from total turnover for the purpose of computing deduction u/s. 10A of the I.T. Act.

IT(TP)A No.227 & 285/Bang/2013 Page 8 of 40 11. In the rejoinder, it was submitted by the ld. AR of assessee that as per judgment of Hon’ble High Court of Karnataka rendered in the case of CIT v. Tata Elxsi Ltd., 349 ITR 98 (Karn), total turnover is sum total of export turnover and domestic turnover and therefore, if an item is excluded from export turnover, total turnover also goes down by that amount as a consequence.

Sl.No. Name of the company OP/TC % 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd. 29.81 5 Flextronics (Aricent) 7.86 6 iGate Global Solution Ltd. 13.99 7 Infosys 40.37 8 Kals Information Systems Ltd (Seg) 41.94 9 LGS Global Ltd. 27.52 10 Mindtree Ltd (seg) 16.41 11 Persistent Systems Ltd. 20.31 12 Quintegra Solution Ltd. 21.74 13 R Systems International (Seg) 15.30 14 R S Software (India) Ltd. 7.41 15 Sasken CommunicationTEchnologies Ltd. (Seg) 7.58 16 Tata Elxsi (Seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd. 16.50 AVERAGE 23.65

IT(TP)A No.227 & 285/Bang/2013 Page 9 of 40 13. Now, we find that in the case of Kodiak Networks India Pvt. Ltd. v. DCIT (supra) also, the same 20 comparables were considered by the TPO with arithmetic mean of 23.65% and this issue was decided by the Tribunal in that case in favour of assessee by holding that 12 comparables out of those 20 comparables are to be excluded from the list of comparables as considered by the TPO. The relevant para of this Tribunal’s order are paras No.17 to 25 available on pages 246 to 272 of the PB. These paras are reproduced hereinbelow for ready reference:-

“17. The assessee has taken grounds of appeal no.9 to 23, however, the only effective and relevant ground is ground No.9 and other grounds are supporting in nature which are in respect of transfer pricing adjustment.

18. The assessee company is a subsidiary of Kodian Networks Inc, USA (KODIAK US). The assessee provides software development and related service and customer support services in short “CSS” or “ITES” to Kodiak US. The assessee rendered these services exclusively to its group companies and is compensated on cost plus margin of 10% for its services. For the year under consideration, the assessee has reported the international transactions with its Associated Companies (AE) which are as under : S.No Particulars Rs. 1 Rendering of software development and related services 26,72,70,160 2 Rendering of customer support services 2,93,14,632 3 Rendering of sales and marketing support services 3,88,437 4 Import of capital goods 35,91,861 5 Reimbursement of expenses received 91,99,469

The assessee has provided services to its AE under two segments viz (i) Software Development & Related Services and (ii) Customer and support services being “ITES”. We will first take up the issue of Transfer Pricing Adjustment in respect of international transaction of providing software development services to the AE. The software applications developed by the assessee are in the field of telecom call processing, element management systems and signaling protocol adaption. The architecture and specifications for the application are developed by the associated enterprise based on which the assessee develops the software modules and delivers the same to the associated enterprise. Thus, the assessee is providing purely software development services to its AE. In its Transfer Price study analysis the assessee has bench marked its services by adopting the “Transactional Net Margin Method” (TNMM) as most appropriate method with IT(TP)A No.227 & 285/Bang/2013 Page 10 of 40 OP/TC as Profit Level Indicator (PLI) and selected 17 comparables. The assessee has computed arithmetic mean of the comparables at 14.76% in comparison to the assessee’s operating margin on cost at 10.73% and accordingly the assessee claimed that margin of the assessee is within 5% range of the Arms’’ Length Price (AL)/ arithmetic mean of the comparables .The TPO rejected 16 out of 17 companies selected by t he assessee and carried out fresh search by applying the filter as under : o Companies whose data is not available for FY 2007-08 were excluded. o Companies whose software development service income is less than Rs.1 crore were excluded. o Companies whose Software Development Service revenue is less than 75% of the total operating revenues were excluded. o Companies having more than 25% related party transactions (sales as well as expenditure combined) of the operating revenues were excluded. o Companies having less than 25% of the revenue as export sales were excluded. o Companies whose onsite income is more than 75% of the export revenues were excluded. o Companies whose employee cost to revenues is less than 25% of the revenues were excluded. o Companies who have diminishing revenues/persistent losses for the period under consideration were excluded. o Companies having different financial year (i.e., not March 31, 2008) or data of the company does not fall within 12 month period i.e. 01-04-2007 to 31-03-2008, were rejected. o Companies that are functionally different from that of taxpayer were rejected. Applying the above filters, the learned TPO selected 20 companies as comparables and determined the arithmetic mean margin of the comparables at 23.65%.

IT(TP)A No.227 & 285/Bang/2013 Page 11 of 40 S.No. Operating Name of the Company Margin on cost 1 Avani Cimcon Technologies Ltd 25.62% 2 Bodhtree Ltd 18.72% 3 Celestial Biolabs Ltd 87.94% 4 E-Zest Solutions Ltd 29.81% 5 Flextronics Software Systems Ltd 7.86% 6 iGate Global Solutions Ltd 13.99% 7 Infosys Technologies Ltd 40.37% 8 KALS Information Systems Ltd (Seg.) 31.29% 9 LGS Global Ltd (Lanco Global Solutions Ltd) 27.52% 10 Mindtree Ltd 16.41% 11 Persistent Systems Ltd 20.31% 12 Quintegra Solutions Ltd 21.74% 13 R Systems International Ltd (Seg.) 15.30% 14 R S Software (India) Ltd 7.41% 15 Sasken Communication Technologies Ltd 7.58% (Seg.) 16 Tata Elxsi Ltd (Seg.) 18.97% 17 Thirdware Solutions Ltd (Seg) 19.35% 18 Wipro Ltd (Seg.) 28.45% 19 Softsole India Ltd 17.89% 20 Lucid Software Ltd 16.50% Arithmetic Mean 23.65% Accordingly, the TPO proposed the adjustment in respect of software development segment at Rs.3,45,24,884/- The assessee objected the adjustment proposed by the TPO before the DRP. The DRP confirmed the adjustment on account of ALP of software development services provided by the assessee while passing the impugned direction.

19. Before us, the ld. AR has submitted that 12 out of 20 companies considered by the TPO for determination of ALP in respect of international transactions for providing software development services, are not comparable with the assessee. Thus, the ld. AR submitted that these 12 companies should be excluded from the set of comparables for determination of the ALP. He has contended that all these 12 companies have been considered by the co-ordinate Bench of this Tribunal in the series of decisions including the decision in the case of M/s 3DPLM Software Solutions Ltd V/s DCIT in IT(TP)A No.1303/Bang/2012 (AY-2008-09) dated 28.11.2013. Thus, the ld. AR has pointed out that this Tribunal in various cases has held that these companies cannot be considered as comparables with the software development services as provided by the IT(TP)A No.227 & 285/Bang/2013 Page 12 of 40 assessee. He has also invited our attention to various decisions of this Tribunal wherein these companies were rejected as comparables of software development services provider. Apart from these 12 companies, the ld.AR is also seeking exclusion of M/s Bodhtree Ltd from the list of comparables as additional ground raised

by the assessee on the ground that in case of M/s Mindtech (India) Ltd, V/s DCIT in IT(TP) No.70/Ban/2014 (AY-2009-10) dated 21.8.2014 this Tribunal has held that M/s Bodhtree Ltd cannot be considered as comparables. Thus, the ld. AR has submitted that after excluding these 13 companies from the list of comparables the mean margin of remaining companies selected by the TPO comes to 13.72 % and after adjustment of working capital it comes to 13.50 % in comparison the operating martin of the assessee at 11.30% which is within the range of ±5% and therefore no adjustment is called for.

20. On the other hand, the ld. DR submitted that TPO took segmental data in case of M/s KALS Information Systems Ltd (Seg.), M/s Tata Elxsi Ltd (Seg.) and M/s Wipro Ltd (Seg.), therefore, the objection raised by the assessee that these companies are functionally not comparable with the assessee is not sustainable. As regard M/s Quintegra Solutions Ltd, the ld. DR submitted that it is assessee’s own comparable included in the TP study report and therefore, the assessee cannot ask for rejection of the said company as comparable. He has relied upon the orders of authorities below. In rejoinder, the ld. AR has submitted that though M/s Quintegra Solutions Ltd was part of the TP study of the assessee but it was found that the said company is not comparable with the function of the assessee and therefore, it cannot be included in the list of comparables for determination of ALP. He has relied upon the decision of Special Bench of ITAT of Chandigarh Bench in the case of DCIT V/s QUARK SYSTEMS (P.) LTD. [2010] 38 SOT 307 (ITAT [Chand]). The ld. AR has further pointed out that in case of M/s KALS Information Systems Ltd (Seg.), M/s Tata Elxsi Ltd (Seg.) and M/s Wipro Ltd (Seg.), the result of software segment are included in software product and no separate data for software development segment are given by these companies, therefore, the revenue and the margin of composite segment of software product and software development service cannot be compared with the revenue and margin of the assessee from software development alone.

21. We have considered the rival submissions and relevant material available on record. As we have narrated the facts in the foregoing paras that the TPO has determined the ALP by taking into consideration the set of 20 comparables. The assessee has raised objection regarding 13 comparables out of 20 selected by the TPO. The companies against which the assessee raised objections are as under:

IT(TP)A No.227 & 285/Bang/2013 Page 13 of 40

S.No. Name of the Company 1 Avani Cimcon Technologies Ltd 2 Bodhtree Ltd 3 Celestial Biolabs Ltd 4 E-Zest Solutions Ltd 5 Infosys Technologies Ltd 6 KALS Information Systems Ltd (Seg.) 7 Lucid Software Ltd 8 Persistent Systems Ltd 9 Quintegra Solutions Ltd 10 Softsole India Ltd 11 Tata Elxsi Ltd (Seg.) 12 Thirdware Solutions Ltd (Seg 13 Wipro Ltd (Seg.)

IT(TP)A No.227 & 285/Bang/2013 Page 14 of 40 included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions: i) Trilogy E-Business Software India Pvt. Ltd. V DCIT (ITA No.1054/Bang/2011) ii) Telecordia Technologies India Pvt Ltd V ACIT (ITA No.7821/Mum/2011) It was also submitted that this company has been held to be functionally not comparable to the assessee by a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in dt.22.2.2013. 7.3 The learned Authorised Representative further submitted that the facts pertaining to this company has not changed from the earlier year (i.e. Assessment Year 2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that:- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like “DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a co-ordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof:- “9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons:-

IT(TP)A No.227 & 285/Bang/2013 Page 15 of 40 (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Triology case are comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Triology E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly.” The learned Authorised Representative submits that this company was selected as a comparable by the TPO not by any FAR analysis or as per the search process conducted by the TPO, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a company can be selected as a comparable only on the basis of IT(TP)A No.227 & 285/Bang/2013 Page 16 of 40 FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned Authorised Representative also submitted that he has brought on record sufficient evidence to show that the functional profile of this company remains unchanged from the earlier year and hence the findings rendered by the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in other cases like Triology E-Business Software India Pvt. Ltd. (supra) are applicable to the year under consideration as well. 7.5 Per contra, the learned Departmental Representative supported the order of the TPO / DRP for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Nonfurnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected IT(TP)A 1380/Bang/2012 Page 7 of 34 on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in dt.22.2.2013, and in the case of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables.

IT(TP)A No.227 & 285/Bang/2013 Page 17 of 40 8.0 Bodhtree Consulting Ltd. 8.1 This company has been selected as a comparable company to the assessee by the TPO; the inclusion of which was not objected to by the assessee before both the TPO and the DRP. The assessee has not objected to the inclusion of this company in the list of comparables, as can be seen from the grounds of appeal raised in Form 36B before this Tribunal. 8.1 However in the course of proceedings before us, the learned Authorised Representative objected to the inclusion of this company as a comparable for the following reasons: (i) This company has reported abnormally fluctuating margins in the period from 2005 to 2011, which indicate abnormal business factors and abnormal profit margins and hence should not be considered as comparable to the assessee. (ii) The abnormally fluctuating margins indicate that this company bears higher risk in contrast to the assessee who has earned consistent margins over the years, indicating difference in the risk profile between this company and the assessee. (iii) This company has registered exponential growth of 67% in terms of revenue and 41% in terms of profits over the immediately preceding year which can be attributed to the development of a software application, MIDAS (Multi Industry Data Anomaly) which was made available for customers as SaaS (Software as a Service). 8.3 Per contra, the learned Departmental Representative opposed the exclusion of this company from the list of comparable companies. The learned Departmental Representative contended that since the assessee had accepted the TPO’s proposal for inclusion of this company in the set of comparables and had not objected to its inclusion even before the DRP, the objections raised by the assessee in this regard, at this stage, ought to be rejected. 8.4.1 We have heard both parties and perused and carefully considered the material on record. Admittedly, there is no disputing the fact that the assessee had never objected to the inclusion of this company in the set of comparables in earlier proceedings before the TPO and the DRP. It is also seen that even in the grounds of appeal raised before us, the assessee has not raised any grounds challenging the inclusion of this company in the list of comparables. In fact in the assessee's own case for Assessment Year 2007-08, this company was selected as a comparable by the assessee itself. We, therefore, find no merit in the contentions raised by the learned Authorised Representative of the assessee in respect of this company at this stage of proceedings.

IT(TP)A No.227 & 285/Bang/2013 Page 18 of 40 8.4.2 It is also seen from the submissions made before us that the assessee has only pointed out fluctuating margins in the results of this company over the years. This, in itself, cannot be reason enough to establish differences in functional profile or any clinching factual reason warranting the exclusion of this company from the list of comparables. In this view of the matter, the contentions of the assessee are rejected and this company is held to be comparable to the assessee and its inclusion in the list of comparable companies is upheld.

IT(TP)A No.227 & 285/Bang/2013 Page 19 of 40 this company as not qualifying for comparability. We therefore accept the plea of the assessee in this regard.” (iv) The rejection / exclusion of this company as a comparable for Assessment Year 2007-08 for software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. in CSR India Pvt. Ltd. in IT (TP) A No.1119/Bang/2011 and by the ITAT, Delhi Bench in the case of Transwitch India Pvt. Ltd. in ITA No.6083/Del/2010. (v) The facts pertaining to this company have not changed from Assessment Year 2007- 08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and therefore there cannot be an assumption that it would continue to be applicable for the period under consideration i.e. Assessment Year 2008-09. 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO’s order for the earlier year. It is evidently clear from this that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record IT (TP) A 1380/Bang/2012 Page 8 of 34 substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of IT(TP)A No.227 & 285/Bang/2013 Page 20 of 40 Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in and Triology E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted from the list of comparables. The A.O. /TPO are accordingly directed.

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(iv) The facts pertaining to this company has not changed from Assessment Year 2007- 08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the case on hand and hence ought to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative drew our attention to various parts of the Annual Report of this company. (v) This company is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. ‘Virtual Insure’ and ‘La-Vision’ and b) The Training segment which does not have any product revenues.

10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details culled out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133 (6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co- ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of coordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company’s Annual Report to IT(TP)A No.227 & 285/Bang/2013 Page 22 of 40 establish that this company is IT(TP)A 1380/Bang/2012 Page 9 of 34 functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the coordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly.” “11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover IT(TP)A 1380/Bang/2012 Page 24 of 34 and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that:- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA; IT(TP)A No.227 & 285/Bang/2013 Page 23 of 40 (iv) the company has substantial revenues from software products and the break up of such revenues is not available; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY’, a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis- similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.

12. Wipro Ltd. 12.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several grounds like functional dis-similarity, brand value, size, etc. The TPO, IT (TP) A 1380/Bang/2012 Page 26 of 34 however, brushed aside the objections of the assessee and included this company in the set of comparables.

IT(TP)A No.227 & 285/Bang/2013 Page 24 of 40 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons:- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO’s own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 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 IT(TP)A No.227 & 285/Bang/2013 Page 25 of 40 patents and several pending applications for grant of patents. In this regard, the coordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a 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.”

(i) The co-ordinate bench of the Mumbai Tribunal in the case of Telcordia Technologies (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore this company cannot be considered as a comparable to the assessee in the case on hand. (iii)Tata Elxsi Ltd. is predominantly engaged in product designing services and is not purely a software development service provider. In the Annual Report of this company the description of the segment ' software development services' relates to design services and are not to software services provided by the assessee.

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(iv) Tata Elxsi Ltd. invests substantial funds in research and development activities which have resulted in the 'Embedded Product Design Services Segment' of the company to create a portfolio of reusable software components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons; Tata Elxsi Ltd. is clearly functionally different/dis-similar from the assessee and therefore ought to be omitted from the list of comparables.

13.3 Per contra, the learned Departmental Representative supported the stand of the TPO in including this company in the list of comparables. 13.4 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services" relates to design services and are not similar to software development services performed by the assessee. 13.5 The Hon'ble Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below:— " …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.

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(i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain Communications (P.) Ltd. v. ITO [2009] 118 ITD 243/ [2008] 23 SOT 385 (Pune), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company.

The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables.

IT(TP)A No.227 & 285/Bang/2013 Page 29 of 40 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications (P.) Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.

16. Lucid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that — (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a co- ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd.(ITA No.7821/Mum/2011) (iii)The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India (P.) Ltd and CSR India (P.) Ltd. (supra) and by the Delhi Bench of the Tribunal in the case of Transwitch India (P.) Ltd. (supra).(ITA No.6083/Del/2010) (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development.

IT(TP)A No.227 & 285/Bang/2013 Page 30 of 40 The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e.Lucid software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT (TP) A No.845/Bang/2011), LG Soft India (P.) Ltd. (supra), CSR India (P.) Ltd. (supra); the ITAT, Mumbai Bench in the case of Telcordia Technologies India (P.) Ltd (supra) and the Delhi ITAT in the case of Transwitch India (P.) Ltd. (supra) have held that since this company, is engaged in the software product development and not software development services, it is functionally different and dis- similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.

17. Persistent Systems Ltd. 17.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year

IT(TP)A No.227 & 285/Bang/2013 Page 31 of 40 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that:

(i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand.

(ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced software Product Development Services' for independent software vendors and enterprises.

(iii) Website extracts indicate that this company is in the business of product design services.

(iv) The ITAT, Mumbai Bench in the case of Telcordia Technologies India (P.) Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available.

The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables.

IT(TP)A No.227 & 285/Bang/2013 Page 32 of 40 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.

18. Quintegra SolutionsLtd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had any influence on the pricing or the margin earned. 18.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that,

(i) Quintegra Solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand.

(ii) In its Annual Report, the services rendered by the company are described as under :

"Leveraging its proven global model, Quintegra provides a full range of custom IT Solution (such as development,

IT(TP)A No.227 & 285/Bang/2013 Page 33 of 40 testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies."

(iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under :

"Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company …………… have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks."

(iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration.

The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solution Ltd. being functionally different and possessing its own intangibles/IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has IT(TP)A No.227 & 285/Bang/2013 Page 34 of 40 substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted from the list of comparables, as in the case on hand. 18.5 We also find from the Annual Report of Quintegra Solution Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), we direct that this company i.e. Quintegra Solution Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider.

19. Softsol India Ltd. 19.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable on the grounds that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that as per the company's reply to the notice under section 133(6) of the Act, the company has categorized itself as a pure software developer and therefore included this company as a comparable as the assessee was also a provider of software development services. Before us, in addition to the plea that the company was functionally different, the assessee submitted that this company was excluded from the list of comparables by the order of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (ITA No. 845/Bang./2011) on the ground that the 'Related Party Transactions ('RPT') is in excess of 15%. The learned Authorised Representative submitted that for the current period under consideration, the RPT is 18.3% and therefore this company requires to be omitted from the list of comparables. 19.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables as this company was a pure software development service provider like the assessee.

IT(TP)A No.227 & 285/Bang/2013 Page 35 of 40 19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in has excluded this company from the set of comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra). As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the co-ordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand.

23. Thus, it is clear from the findings of the Co-ordinate Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd (supra) that except Bodhtree Ltd all other 12 companies were found to be not good comparables of the software development services as provided by assessee.

25. Thus, out of 20 comparables, 12 companies are required to be excluded from the list of comparables for determining the ALP. Accordingly, we direct the TPO/AO to exclude the following companies from the set of comparables and recomputed the ALP after considering the claim of risk adjustment as well as working capital adjustment:” S.No. Name of the Company 1 Avani Cimcon Technologies Ltd 2 Celestial Biolabs Ltd 3 E-Zest Solutions Ltd 4 Infosys Technologies Ltd 5 KALS Information Systems Ltd (Seg.) 6 Lucid Software Ltd 7 Persistent Systems Ltd 8 Quintegra Solutions Ltd 9 Softsole India Ltd

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10 Tata Elxsi Ltd (Seg.) 11 Thirdware Solutions Ltd (Seg 12 Wipro Ltd (Seg.) 14. From the above para 25 of the Tribunal’s order reproduced, it is seen that out of same 20 comparables, it was held by the Tribunal that 12 companies are required to be excluded from the list of comparables for determining the ALP. No difference in facts could be pointed out by the ld. DR of Revenue in the present case and in that case i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra). In that case also, the issue in dispute was regarding TP adjustment in respect of software development activity of the assessee as in the present case. The 20 comparables selected by the TPO in the present case and in that case are the same. The reasoning given by the tribunal in that case for exclusion of 12 comparables is this that these companies are functionally dis–similar and different. In the present case, the function of the assessee company is claimed to be similar to that company i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra) and the learned DR of the revenue could not point out any difference in the function of the present assessee company and that company i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra). Therefore, by respectfully following that tribunal order, we hold that in the present case also, the same 12 comparables are to be excluded for working out the ALP, as was held by the Tribunal in that case. As per the working submitted by the ld.AR of the assessee, it is seen that when the said 12 comparables are excluded, the ALP as per the working of remaining 8 comparables is 14.35% without adjustment on account of working capital margin and 13.86% after adjustment on account of working capital margin and the said working submitted by the assessee on page 11 of written submissions filed before us on the date of hearing is reproduced hereinbelow:-

IT(TP)A No.227 & 285/Bang/2013 Page 37 of 40

Operating Adj. Margin Margin SI.No. Name of the Company 1 LGS Global Ltd (Lanco Global Solutions 27.52% 26.95% 2 R S Software (India) Ltd 7.41% 8.68% 3 R Systems International Ltd (Seg.) 15.30% 13.79% 4 Bodhtree Ltd 18.72% 19.60% 5 Flextronics Software Systems Ltd 7.86% 6.42% 6 iGate Global Solutions Ltd 13.99% 12.58% 7 Mindtree Consulting (Seg) 16.41% 15.68% 8 Sasken Communication Technologies Ltd 7.58% 7.14% Arm's length margin 14.35% 13.86%

15. As per the above working, even if we consider the operating margin without excluding the working capital adjustment, the same is 14.35% which is within +/- 5% range of the assessee’s operating profit reported at 9.60% and therefore no TP adjustment is called for. We hold accordingly.

IT(TP)A No.227 & 285/Bang/2013 Page 38 of 40 Pvt. Ltd. v. DCIT (supra) that these comparables are not to be excluded and therefore, in the present case also, we have held that these comparables are not to be excluded. To this extent, ground No.2 of the Revenue’s appeal stands allowed.

22. Now we will decide ground Nos. 11 & 12 of Revenue’s appeal in respect of deduction u/s. 10A of the I.T. Act.

IT(TP)A No.227 & 285/Bang/2013 Page 40 of 40 24. Remaining grounds of Revenue’s appeal are general in nature and these grounds do not call for any separate adjudication.

Pronounced in the open court on this 22nd day of April, 2016.