DCIT, BANGALORE vs. M/S KEANE INTERNATIONAL (INDIA) PVT. LTD.,, BANGALORE

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 2 of 33 O R D E R Per INTURI RAMA RAO, AM : These cross appeals by the revenue as well as the assessee and directed against the order of the ld.CIT(Appeals)-IV, Bangalore, dated 30th August 2013 for the assessment year 2005- 06.

� Software development services Rs.179,11,84,691/- � Recovery of airfare, travel advance etc. Rs. 17,46,86,875/- � Reimbursement travel expenses paid Rs.5,83,17,868/-

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 3 of 33 The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm’s length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting the operating profit to total cost (OP/TC) as a profit level indicator for the transfer pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee-company’s profit margin was computed at 16.9% and the assessee-company claimed that the same was comparable with other companies rendering software development services. For the purpose of transfer pricing study, the assessee-company had chosen 18 comparable entities and arithmetic average of operating profit margins of said comparables was computed at 9.73%. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm’s length. The assessee-company had chosen the following 18 entities as comparables whose average profit margin was computed at 9.73%:

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 4 of 33

• Use of current year data (i.e. FY 2004-05) only; • Turnover filter i.e. excluding companies having income from software development services less than INR 1 crore. • Software development services income less than 75% of total operating revenues; • Related party transactions greater than 25% of sales; • Export sales less than 25% of operating revenues; • Diminishing revenue/persistent operating loss; • Different financial year ending or financial data not pertaining to 12 month period i.e. 01/04/2004 to 31/03/2005; • Employee cost less than 25% of sales; and • Onsite income greater than 75% of their operating revenue.

The TPO rejected 15 of the comparables selected by the assessee-company in the TP study and introduced 14 new companies and finally selected the following comparables:

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 6 of 33 The TPO computed average profit margin of the comparables finally selected at 26.59% and after giving working capital adjustment of 1.24%, the adjusted arithmetical mean PLI was determined at 25.35%. On the above said basis, the TPO computed the transfer pricing adjustment as follows:

Arms length price @ 125.35% of operating cost …. Rs.211,45,86,091/- Price received including reimbursement Rs.196,58,71,566/- Shortfall being adjustment u/s 92CA Rs. 14,87,14,525/-

a) Income from human resource services to be reduced from profit of the business b) Telecom expenses for delivery of software to be excluded from export turnover, and c) Other income in the nature of interest income and miscellaneous income to be excluded from the profits of the business.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 7 of 33 The AO also held that the communication expenses be reduced from the export turnover for the purpose of computing the deduction u/s 10A of the IT Act, 1961.

a) Infosys Technologies Ltd.(42.83%) b) Satyam Computer Services Ltd.(29.44%) c) L&T Infotech Ltd.(10.33%). The ld.CIT(A) had restored the issue to the file of the TPO on the issue of functional dissimilarity. The ld.CIT(A) had upheld the inclusion of Thirdware Solutions Ltd., by holding that no company can be excluded on the ground of abnormal profits or losses unless the assessee demonstrates and establishes that abnormal profits were earned wholly on account of some extraordinary event taking place. In this connection, he placed reliance on the decision of Bangalore bench of Tribunal in the case of TrilogyE- Business Services Pvt. Ltd. reported in 29 taxmann.com 310. The ld.CIT(A) however, upheld the action of the TPO in using multiple

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 8 of 33 year data. The ld.CIT(A) further held that it was not necessary to establish the intention of the assessee not to shift profits out of India since availing tax holiday benefits u/s 10A for invoking the transfer pricing provisions.

6.1 The ld.CIT(A), vide para.2.1 of his order held that the assessee-company is entitled for deduction u/s 10A. He also held that income earned from supply of man power, and interest on miscellaneous income did not have nexus with the activity of export of software and therefore held that they cannot be treated as part of business profits for the purpose of computing deduction u/s 10A of the Act.

6.2 As regards telecommunication expenses incurred for delivery of software, held that the same should be reduced from the export turnover as well as the total turnover for the purpose of computing deduction u/s 10A of the Act placing reliance on the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd. (349 ITR 98).

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 9 of 33 “On the facts and in the circumstances of the case and in law, 1. the learned CIT(A) has erred in law and facts, by conforming with the learned assessing officer (learned AO")/ the learned Transfer Pricing Officer ("learned TPO") and not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules"), for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length; 2. the learned CIT(A) has erred in upholding the action of the learned TPO in obtaining information which was not available in public domain by exercising powers u/s 133(6) of the Act and relying on the information for comparability analysis; 3. the learned CIT(A) has erred in holding that despite the fact that the Appellant is availing tax holiday benefits under section 10A of the Act, the leaned AO is not required to prove the Appellant's intention to shift profits to its AE, which is one of the basic intentions for introduction of transfer pricing provisions in India; 4. the learned CIT(A) has erred in upholding the action of the learned TPO in ignoring the consistency in sharing methodology and similarity of transaction and their acceptance in the earlier and subsequent years and has erred in holding that the determination of the arm's length price by the Assessee accepted by the Revenue authorities in any earlier year cannot operate as res-judicata for any other assessment year; 5. the learned CIT(A) has erred in upholding the action of the learned AO/TPO in conducting a fresh economic analysis considering only FY 2004- 05 financial data at the time of assessment proceedings, the data pertaining to which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 6. the learned CIT(A) has erred in upholding the IT(TP)A Nos.1487 & 1496/Bang/2013 Page 10 of 33 action of the learned AO/TPO in accepting/rejecting companies by applying different quantitative and qualitative filters, without considering the arguments put forth by the Appellant regarding inappropriateness of the following filters and without providing any cogent reasons: a) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying export revenues greater than 25% of total revenues filter as a comparability criterion in the search strategy to identify comparable companies; b) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying diminishing revenue filter as a comparability criterion in the search strategy to identify comparable companies, i.e. rejecting companies as having economic performance contrary to industry behavior; c) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying a filter to reject companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months, in the search strategy to identify comparable companies; d) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying onsite revenues greater than 75% of the total revenues filter as a comparability criterion in the search strategy to identify comparable companies; 7. the learned CIT(A) has erred in upholding the action of the learned AO/TPO of applying a turnover filter of less than 1 crore; 8. the learned CIT(A) has erred in not adjudicating on the Appellant's contentions against 11 specific companies accepted by learned TPO which are to be rejected on account of functional dissimilarity and have instead summarily directed the learned TPO to exclude functionally dissimilar companies

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 11 of 33 without specific directions;

9. the learned CIT(A) has erred in upholding the action of the learned TPO in accepting companies showing abnormal/super normal profits as comparable to the Appellant; 10.the learned CIT(A) has erred in not adjudicating the action of the learned TPO in incorrectly computing the margin of one company, and in not considering the foreign exchange fluctuation gain/(loss) in computing the operating margin of the comparable companies; instead held such ground to be general in nature; 11.the learned CIT(A) has erred in not adjudicating the action of the learned TPO in adding the amount of the reimbursements of expenses incurred by the Appellant on behalf of its AEs to the operating cost for the purpose of determining ALP under the Transactional Net Margin Method; instead held such ground to be general in nature; 12.the learned CIT(A) has erred in holding that where an adjustment to the differences in working capital is provided, no further adjustments on account of differences in the risk profile of the Appellant vis-à-vis the comparables is warranted; 13.the learned CIT(A) has erred in upholding the action of the learned AO/TPO in computing the arm's length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act; 14.The learned CIT(A) has erred in law and on facts in not expunging the remarks of the Assessing Officer holding that deduction under section 10A of the Act should not be eligible for recruitment fees as such remarks were made without verifying the nature of services undertaken by the Appellant in this regard; 15.The learned CIT(A) has erred in law and on facts in not appreciating that the recruitment fees is eligible for deduction under section 10A of the Act since it is covered within the notified information technology enabled services constituting computer software;

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 12 of 33 16.The learned CIT(A) has erred in law and on facts in ignoring and not following the Honourable Tribunal's decisions in the Appellant's own case for the assessment year 2007- 08, being binding on the lower authorities, without appreciating the fact that the issues and facts covered under the present appeal are identical and similar with that of the Appellant's own case for the AY 2007-08; 17.The learned CIT(A) has erred in law and on facts in not granting deduction under section 10A of the Act in respect of interest income and miscellaneous income which form part of the business income of the Appellant.

9.1 The learned AR of the assessee-company submitted that the comparables chosen by the TPO viz., Bodhtree Consulting, Exensys Software Solutions, Flextronics Software Systems, Geometric Software Solutions, Sankhya Infotech, Tata Elxsi and Thirdware Solutions are not comparable on account of functional differences. He relied on the order of the co-ordinate bench of Tribunal in IT(TP)A No.532/Bang/2013 dated 30/07/2015 in the case of DCIT vs. Kodiak Networks India Pvt. Ltd., wherein the Tribunal held that on account of wide fluctuations in the margin, Bodhtree Consulting cannot be treated as comparable. The relevant paragraphs are as under:

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 13 of 33 “34. As can be seen from the above analysis, this company has erratic margins and growth over the years. The margins of Bodhtree are consistently changing. This reflects that the revenue recognition policy followed by Bodhtree is not proper and is resulting in consistent change in margins. Further, the growth rate over the years is also fluctuating to extremes. Further, growth in revenues is not supported by growth in expenses. In some cases, expense growth is higher than the revenue growth. Also salary cost ratio is widely fluctuating. These circumstances are peculiar in nature and require further analysis, without which this company should be rejected as a comparable.

9.2 From a perusal of the order of the co-ordinate bench in the case of Kodiak Networks India Pvt. Ltd (supra) it is clear that the Tribunal has followed its earlier decision in Mindtech India Ltd. vs. DCIT in dated 21/8/2014 wherein it was held that on account of change in method of accounting of the revenue recognition, there were fluctuations in the profit margins of the company. The decision in Mindtech India Ltd. is in relation to assessment year 2009-10 and the decision was based on the reasoning that there were fluctuations in the margins of the company whereas in the present case we are concerned with the assessment year 2005-06. It is clear from the chart produced in para.33 of order in IT(TP)A No.532/Bang/2013 in the case of Kodiak Networks India Pvt. Ltd., that the financial data from the financial year 2004-05 was furnished. When compared to IT(TP)A Nos.1487 & 1496/Bang/2013 Page 14 of 33 financial year 2004-05, there were no wide fluctuations in the financial results of the company in the financial year 2005-06. Therefore, in our considered opinion, this company cannot be excluded from the list of comparables on the ground of wide fluctuations in the margins of the company, without going into the issue whether wide fluctuation would have any impact on the comparability.

9.3 However, the assessee-company’s contention before the TPO as well as before us is that this company is engaged in the sale of IT products as well as software development services and no segment details were available. It was further submitted that this company had related party transaction.

9.4 We find that the above submissions are not supported by the annual financial results of the company enclosed in the paper book placed at pages 895 to 920. From the Director’s report at page 906 of the paper book, it is clearly stated that the company has only one segment i.e. software development. In the notes to the accounts, at page 920 of the paper book, it is clearly mentioned that except managerial remuneration paid to managing director, there were no other related transactions. Therefore, the submissions of the assessee-company on this score cannot be accepted as devoid of any substance.

9.5 In the result, we uphold the action of TPO in including this company in the list of comparables.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 15 of 33 10. As regards Exensys Software Solutions Ltd., this comparable was selected by the TPO. The assessee-company objected to the inclusion of this company in the list of comparables on the ground that it is engaged in the software products and had related party transactions. This contention was rebutted by the TPO by drawing attention to the annual report of the company, wherein it was specifically stated that the company is not engaged in any software product sales. The TPO by exercising the power u/s 133(6) of the IT Act called for information from the said company wherein the said company had stated vide its letter dated 14/11/2007 that it had no related party transactions.

10.1 The ld.AR of the assessee-company had relied on the order of the co-ordinate bench of Tribunal in the case of ITO vs. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 dated 11/6/2015 wherein this Tribunal, vide para.14 of its order, had directed the exclusion of this company from the list of comparables on the ground that the company is dealing in the software products and earned abnormal profits on account of amalgamation etc.

10.2 We perused the annual report of this company paced at pages 1097 to 1129 of the paper book. From perusal of page 1104 of the paper book it is clear that the nature of business of the company is software development services. Therefore, the IT(TP)A Nos.1487 & 1496/Bang/2013 Page 16 of 33 submission of the assessee-company that it is engaged in the software products is not supported by the material on record. However, in the Director’s report (page 1106 of paper book), it is stated that the company Holool India Ltd., is amalgamated with assessee-company w.e.f. 1/4/2004 and it was further stated that the combined financial results were stated in the annual report. But it is not the case of the assessee-company that the amalgamating company is functionally dissimilar. In fact, the notes to accounts states that this amalgamated company i.e. Holool India Ltd. is also engaged in the same business as that of the assessee-company. Therefore, the event of merger itself cannot a factor for exclusion of this company from the list of comparables, as held by the Mumbai bench of the Tribunal in the case of Wills Processing Services (India) (P) Ltd. vs. DCIT (32 taxmann.com 18) (Mum). Hence, this company cannot be excluded from the list of comparables.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 17 of 33 noticed that the revenue from the services constitutes more than 85%. Therefore, it can be treated as a software development services company as it passes through revenue filters adopted by TPO. During the course of hearing before us, the ld.AR of the assessee-company had relied on the order of the co-ordinate bench of Tribunal in the case of ITO vs. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 dated 11/6/2015 and DCIT vs. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012 dated 20/03/2015. On the other hand, learned DR relied on the order of the TPO.

We heard the rival submissions and perused the material on record. The co-ordinate bench in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra) deleted this company as comparable, vide par.26 of the order, on the ground that this company was engaged in the product sales also and therefore, it is functionally dissimilar. But from the order of the TPO as well as the financial results of the company, it is clear that 85% of the revenue of the company is derived from software services. Therefore, it can be safely classified as a software development services. Therefore, this company cannot be excluded from the list of comparables.

Geometric Software Solutions: 12. This Company was selected by the assessee-company and accepted by the TPO as it satisfied all the filters applied by him.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 18 of 33 During the course of hearing, the learned AR of the assessee- company objected to the inclusion of this company on the ground of functional dissimilarities In this connection he relied on the decision of the co-ordinate bench in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra). We heard the rival submissions and perused material on record. On perusal of the order in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra), we find that this company was not considered in the said decision. Therefore, the reliance placed by the learned AR of the assessee-company on this decision is misplaced. Therefore, we do not find any reason to exclude this company from the list of comparables.

Sankhya Infotech:

13.1 Learned AR of the assessee-company again relied on the decision of the co-ordinate bench of the Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra).

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 19 of 33 13.2 We heard the rival submissions and perused material on record. Perusal of the decision of the co-ordinate bench of Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra) on this comparable reveals that the co-ordinate bench had followed the decision of Delhi Tribunal in the case of ITO vs. Colt Technology Services India Pvt.Ltd. (in dt.23/10/2012 and no reasons were given by the Tribunal as to why this company cannot be considered as a comparable. Therefore, we are unable to discern any ratio in the decision cited supra. Thus, the learned AR of the assessee- company could not adduce any other evidence in support of exclusion of this company from the list of comparables. In the circumstances, we uphold the action of the TPO in including this company in the list of comparable.

Tata Elxsi Ltd.: 14. This company was selected by the TPO as comparable. The assessee-company objected to the inclusion of this company in the list of comparables on the ground that major portion of the services are rendered only to Tata Consultancy Ltd., and Tata Sons Ltd. In other words, the assessee-company’s contention is that it has related party transactions of more than 25%. This contention of the assessee-company was rebutted by the TPO by holding that the revenue from Tata Consultancy Services was only Rs.8.41 crores out of total revenue of Rs.146.46 crores which amounts to 5.7% of the total revenue. Thus the contention of the IT(TP)A Nos.1487 & 1496/Bang/2013 Page 20 of 33 assessee-company that it had related party transactions of more than 25% was not accepted by the TPO.

14.1 Before us the learned AR of the assessee-company submitted that this company cannot be considered as comparable on account of functional dissimilarity as Tata Elxsi is engaged in product design services, design engineering services, visual computing labs. In this connection, he has drawn our attention to page 1250 to 1253 of the paper book wherein the activities of the said company were described. A perusal of these pages reveals that it is engaged in the product design services, design engineering services and visual computing labs. Learned AR of the assessee-company placed reliance on the decision of the Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra) and Textron Global Technology Centre Pvt. Ltd. (cited supra).

14.2 We heard the rival submissions and perused material on record. The co-ordinate bench of Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra) held (vide paras. 28 and 29 of the order) that it is not comparable with software development provider such as the assessee.

“28. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: “15.7. TATA ELXSI LIMITED : The objection of the assessee is that TATA Elxsi operating two segments –system communication services and software development services. The TPO accepted the IT(TP)A Nos.1487 & 1496/Bang/2013 Page 21 of 33 software development services segment in his T.P. analysis and assessee’s objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company’s operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22: "22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee.”

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 22 of 33 Keeping the assessee’s objections and the decisions of the Coordinate Bench, prima facie, we are of the view that Elxsi Limited is functionally different and has incomparable size to that of the assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to assessee services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to assessee.”

14.3 We do not find any reason to differ with the decision of the co-ordinate bench in the above cases. Accordingly, we hold that this company cannot be held to be comparable with that of the assessee-company on functional dissimilarities. In our opinion, these activities of the company cannot be equated with the software development service.

Thirdware Solutions: 15. This company was selected by the TPO and the assessee- company objected to the inclusion of this company in the list of comparables on the ground that the financial data was not IT(TP)A Nos.1487 & 1496/Bang/2013 Page 23 of 33 available in the public domain at the time of transfer pricing audit. The TPO held that the data was available in capital line as well as prowess data base. The TPO further held that more than 50% of the revenue is from software development services; this can be considered as a comparable.

15.1 Before us, learned AR of the assessee-company submitted that this company cannot be considered as comparable in the light of the decisions of the co-ordinate bench in the case (i) the Sunquest Information Systems (India) Pvt. Ltd.(cited supra); (ii) Textron Global Technology Centre Pvt. Ltd(cited supra) and (iii) Colt Technology Services India Pvt.Ltd. (cited supra).

15.2 We heard the rival submissions and perused the material on record. The co-ordinate bench (Delhi) of Tribunal in the case Colt Technology Services India Pvt.Ltd. (cited supra) recorded the finding on the above company as follows:

“Thirdware Solutions Ltd, it was submitted that the said company has a diversified functional professional profile and is also engaged in sale of software licenses. They invest in R&D and also provides/sells software licenses and there are no segmental results available in its audited financials to segregate profitability from provision of software development services and from sale of software licences. These information were supported by the annual report for Financial year 2004- 05 of the said company. In its annual report a generic disclosure was made that the company is involved in trading of software and provision of IT services. Schedule 14 of the Financial statement of the said company provide information on details of purchases as per which the total purchase cost incurred by the company was about Rs. 56871743/- as against the total cost of Rs. 175527264/- which is about 32% of the total cost. Besides the said company earned

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 24 of 33 abnormally high OP/TC margin of 66.11% during Financial Year 2004-05 indicating risk dissimilarity vis a vis the assessee which claimed to be a cost plus low risk captive which cannot be expected to earn such high profitability. ” Similarly co-ordinate bench of Tribunal in the case of Textron Global Technology Centre Pvt. Ltd(cited supra) recorded the finding as under:

26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products.

“25. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 25 of 33 26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables.”

15.3 The decision in the case of Sunquest Information Systems (India) Pvt. Ltd.(cited supra) is based on the non-availability of information to make suitable adjustments to bring the company on par with the assessee-company. However, in the present case, the TPO made available full details of the revenue and expenditure in respect of each of the segments and segmental details are very much available. However this company does not pass through the filter of 75% of revenue. Therefore, this company cannot be considered as software development service provider. Hence, we direct the TPO/AO to delete this company from the list of comparables.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 26 of 33 16. The other comparables were either accepted by the assessee-company or not pressed during the course of hearing. Thus, the grounds of appeal Nos.8 to 9 are disposed of.

17. Ground Nos. 9 to 13 are not pressed and hence dismissed as such.

18. Ground Nos.14 & 15 challenge denial of relief u/s 10A in respect of recruitment fees earned. The ld.CIT(A) upheld the action of the AO in denying deduction u/s 10A in respect of recruitment fees placing reliance on the decision of the Hon’ble Supreme Court in the case of Liberty India vs. CIT (317 ITR 218). The relevant finding of the ld.CIT(A) is as under: “From the abovementioned precedents, it is very clear that a receipt should have direct nexus with export activity, to be eligible for a deduction u/s 10A(1) read with section 10A(4) of the Act. I have considered the facts and circumstances of the case and find that the receipts on account of recruitment fees, interest and miscellaneous activity do not have any nexus, whatsoever with the activity of export of computer software. As such they cannot be treated as part of business profits in the computation of deduction u/s/10A. Hence, I uphold the action of the AO.”

We do not find any reason to differ with the reasoning of the ld.CIT(A). Hence, the grounds of appeal in this regard are dismissed.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 27 of 33 : 20. In this appeal by the revenue, the following grounds are raised: 1) The Order of the learned CIT (A) is opposed to law and facts and circumstances of the case. 2) The Ld. CIT(A) erred in following the decision of another ITAT in a different case in directing the TPO to exclude functionally dissimilar companies subject to the guidelines laid down by of the Mumbai Bench of the Hon'ble Tribunal without appreciating the fact that in transfer pricing selection of comparables in a case depends on assessee specific FAR analysis. 3) The Ld. CIT(A) erred in relying on the decisions of the ITAT including those of other benches of ITAT, without appreciating the specific facts brought on record by the TPO in the case of the assessee and the similar issue has been agitated before the Karnataka High Court in other cases. 4) The Learned CIT(A) erred in directing the TPO to exclude functionally dissimilar companies subject to the guidelines laid down by of the Mumbai Bench of the Hon'ble Tribunal without appreciating the fact that when any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee or the TPO and which do not find a place in the order under section 92. CA. 5) The learned CIT (Appeals) erred in striking down the opinion of the AO that deduction u/s 10A is not available in respect of units 1,2,3 and 4 as the production commenced in these units much before obtaining the license for the bonded warehouse by placing reliance on the orders of the ITAT for the A.Y 2001-021 2003- 041 2004-05, 2006-07 and 2007-08 in the IT(TP)A Nos.1487 & 1496/Bang/2013 Page 28 of 33 assessees own case without appreciating the fact that the decision of the ITAT has not been accepted by the department and appeals u/s 260A have been filed before the Hon'ble High Court. 6) The CIT(A) erred in directing the AO to follow the ratio laid down by the High Court in the case of CIT vs Tata Elxsi Ltd. 349 ITR 98 (KAR) while computing the deduction u/s 10A without appreciating the fact that there is no provision in section 10A that telecommunication expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 7) The CIT(A) erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 8) 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 in so far the above issue is concerned and that of the A.O. be restored. 9) 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 Nos.1487 & 1496/Bang/2013 Page 29 of 33 22.1 The ld.CIT(A) had only directed the AO/TPO to exclude the companies which are functionally dissimilar. However, he has not rendered any specific finding in respect of each comparables finally selected by the TPO.

22.2 Now, it is well settled that the companies which are not functionally similar cannot be considered as comparable. Therefore, we do not find any infirmity in the direction of the ld.CIT(A).

23. The revenue is challenging direction of the CIT(A) to exclude the following companies from the list of comparables on the ground that the turnover of the above companies is more than Rs.200 crores relying on the decision in the case of Genesis Integrating Systems (India) Pvt. Ltd. vs. DCIT (20 taxmann.com 715(Bang.):

i. Infosys ii. L&T Infotech iii. Satyam Computer Systems These companies were selected by the TPO as comparables and the assessee-company objected to their inclusion in the list of comparables on the ground of turnover of the above companies is more than Rs.200 crores and the companies had related party transactions. The TPO rejected the submission by holding that the turnover had no co-relation with the profit margin earned by IT(TP)A Nos.1487 & 1496/Bang/2013 Page 30 of 33 the company and also rebutted that the companies had related party transactions by drawing the attention of the assessee- company to the annual reports of those companies.

24.1 L&T Infotech, was objected by the assessee-company on the ground of high turnover and related party transaction. As held in para…..above, the turnover filter was not a relevant criteria in the service industry. Therefore, this objection by the assessee-company is ruled out. The other objection of the assessee-company is that it had related party transaction. The TPO had brought on record that L&T Infotech has related party transaction of only 8%. We do not see any other reason to exclude this company from the list of comparable. Therefore, we uphold the action the TPO in including this company in the list of comparables.

24.2 As regards Satyam Computer Systems, there is no dispute that this company is functionally similar. The only objection of the assessee-company for including this company is high turnover. As held by us above, turnover is not a relevant criteria in the service industry and the company is alleged to have indulged in malpractices only in the subsequent periods and therefore, we do not see any other reason to exclude this company from the list of comparables. Hence, we uphold the action of the TPO in including this company in the list of comparables.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 32 of 33 25. As regards the contention of the revenue that once the criteria filter applied by the assessee-company or TPO is rejected or relaxed, the matter should go back to the TPO for fresh analysis is not tenable. The Special Bench of Tribunal, in eh case of Quartz systems has held that at any stage of proceedings, either before TPO or appellate proceedings, a new comparable can always be considered.

In the light of the decision of the jurisdictional High Court, we do not find any reason to interfere with the order of the ld.CIT(A) on this issue.

IT(TP)A Nos.1487 & 1496/Bang/2013 Page 33 of 33 27. Ground Nos.6 & 7 challenge the direction of the ld.CIT(A) to reduce the tele-communication charges both from export turnover as well as total turnover. This direction is based on the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi (349 ITR 98). In the light of the decision of the jurisdictional High Court, we do not find any reason to interfere with the order of the ld.CIT(A) on this issue.