MERCEDES - BENZ RESEARCH AND DEVELOPMENT INDIA PRIVATE LIMITED,BANGALORE vs. ACIT, BANGALORE

O R D E R Per B. Ramakotaiah, Accountant Member

This is an appeal by the assessee against the order of the Assessing Officer under section 143(3) r.w.s. 144C(13) of the Act, consequent to the directions of the DRP under the Transfer Pricing (TP) provisions.

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(a) The most appropriate method for TP analysis; and (b) if TNMM is the most appropriate method, then the comparability of certain companies, working of operating margins and risk analysis under the TP provisions.

2.1 Even though there are other issues which assessee has raised in the grounds like (i) Multiple year data; (ii)Power of TPO u/s. 133(6) for obtaining data which is not in public domain; and (iii) various filters adopted; these are held against by DRP on the basis of various decisions of Coordinate Benches of ITAT. Assessee has not made any submissions on them, hence these issues are considered academic now.

Issue of selection of MAM

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“5. TP Study Furnished by the Taxpayer: The taxpayer furnished the TP study along with the documents maintained in this regard vide its letter dated 16.10.2009. The salient features of the TP report and the issues arising there from are discussed below: 5.1 The taxpayer company has been selected as the tested party. 5.2 The taxpayer company has been characterized as contract software development service provider in the TP study done by the taxpayer. 5.3 Cost Plus Method was selected as the most appropriate method (annexure4 of the TP report). However, the taxpayer has given neither the set of comparable companies nor has done any comparison of the margins earned by other companies. Annexure 4 of the TP document is about selection of the most appropriate method. The taxpayer has selected cost plus method over other methods. However Annexure VII contains the comparability analysis based on the ‘rate per hour’ charged by different companies. 5.4 The TP report does not mention any search criterion or the data base used to search the comparables. The taxpayer simply picked up 5 big software companies for comparing man hour rate.

IT(TP)A No.1336/Bang/2012 Page 5 of 32 5.1 Thus, TPO based his observations on the order of TPO in AY 2007-

5.2 On a specific query by the Bench, why two methods are taken as MAM and which one is the preferred method, the ld. counsel fairly admitted that CUP is preferable (i.e. external CUP).

5.3 The ld. CIT(DR), however, referred to the orders of TPO and DRP and the position of the Department to submit that the data pertaining to CPM or CUP is not furnished by the assessee and so comparability on TNMM is most appropriate, as it does not effect functional differences, if any, as stated in OECD guidelines and relied on by DRP. Ld. CIT(DR) also referred to Rule 10C to submit that TNMM is the most appropriate method.

5.4 We have considered the rival contentions and perused the details placed on record. As stated by the ld. counsel, the issue of selecting the IT(TP)A No.1336/Bang/2012 Page 6 of 32 most appropriate method in the earlier two years has been set aside to the TPO. For the AY 2006-07, the same was done by way of Misc. Application and in A.Y. 2007-08, consequent to earlier year’s order, the Bench has set aside the issue again. Without prejudice to the same, the Bench has also decided the same under TNMM by excluding certain comparables and given directions in case TNMM is accepted as most appropriate method. The ld. counsel, however, submitted that deciding most appropriate method is required as the contentions of the assessee and department have already been on record. We have considered this contention and examined the assessee’s original as well as revised 3ECB report. In the analysis and selection of method for determination of ALP vis-à-vis export of services, the assessee has adopted CUP and also Cost Plus Method as most appropriate method.

5.5 Against the Cost Plus Method, the assessee states that OECD guidelines called for adoption of this method in cases where semi-finished goods are sold between associates or where there are long term buy and supply arrangements or in the case or provision of services, particularly where these are of subsidiary or peripheral nature. It was stated that appropriate method for attracting R&D services is Cost Plus Method which is ideally suited for the case of the assessee. It was submitted that all costs have been considered and arrived at the gross profit and operating profit margin of around 32% is quite reasonable. The net margin of 5% of overall cost is also very significant and reasonable, especially because the IT(TP)A No.1336/Bang/2012 Page 7 of 32 company does not resume any significant business risks. Thereafter, the assessee has taken 15% of the profits of companies who have R&D activities as per decision of ITAT in Rolls Royce case and analysed the Cost Plus Method.

5.6 However, as the ld. TPO has stated in the report, there is no data furnished by the assessee with reference to Cost Plus method. Even when we enquired, the ld. counsel fairly admitted that assessee would prefer CUP method over Cost Plus Method. In view of this, in the absence of any data, we are not in a position to appreciate the Cost Plus Method. More over, most of captive service provides work on Cost Plus Method ranging from 5% mark-up to 25% mark-up. All the transactions are related party transactions. Therefore, uncontrolled comparable prices are generally not available in the Cost Plus Method. Even the assessee’s analysis of 32% Gross Profit and 5% Net Profit cannot be accepted as there cannot be any Gross Profit in the case of assessee, who is operating on Cost Plus Method. More over, even though the assessee is stated to have been operating on Cost Plus 5% Method, OP/Cost as computed by the assessee itself is at 3.2% and if foreign exchange gain was added to the operating margin, then only it comes to 5%. Generally in a Cost Plus situation, the entire cost spent by the assessee with a mark-up of 5% would be billed to the AE on a periodical basis. The conversion generally done at the prevailing rate of USD or foreign currency involved. Therefore, the basic concept is the margin would be about 5%. In case of any foreign

IT(TP)A No.1336/Bang/2012 Page 8 of 32 exchange gain, this could increase the margin to that extent. In case of foreign exchange loss on the USD / foreign currency quoted by the assessee, then the margin would come down to that extent. However, as seen in this case, the margin without foreign exchange gain itself is less than 5%. Therefore, in the absence of correct cost structure and billing procedure, it is very difficult to accept the Cost Plus Method and analyse the issue.

5.7 The next contention of the assessee is with reference to CUP method. The assessee states in the Annexure III to 3CEB report that ‘there are no internal comparables within the group as entire services of assessee are bought back by AE. Offshore software development work by other companies may represent external comparables. However, data in respect of the same which is available in terms of Euros per hour is not comparable without making suitable adjustments to the differences in the nature and terms of contract/transactions’. As necessary information required for these adjustments is not readily available in the public domain, assessee submits that this cannot be done. Thereafter, assessee proceeded to analyse and submit that on a rough and ready basis, this analysis was done with reference to rates charges by major Indian companies although the functions performed or risk assumed by them are significantly higher, as this will provide the connection of upper price charge at which arm’s length transactions takes place. The assessee has given Annexure-IV working out the USD rates and INR rates worked out at rate per hour to IT(TP)A No.1336/Bang/2012 Page 9 of 32 submit that this was external CUP and assessee’s margin at Rs.1333.63 is higher than other comparable companies. After examining Annexure-VIII of the report, we have asked the ld. counsel about the working adopted by the assessee in arriving at the rate per hour either in USD terms or INR terms. It was submitted that by taking general accounts and annual repot of the respective companies, assessee has derived offshore consultancy amount and thereafter assumed the persons who have worked offshore and then the rate per day at 20 days per month working and rate per hour at 8 hours per day, thus on various assumptions and presumptions, the rate per hour was arrived from the total profits as reported in the public domain. It was fairly admitted that rate per hour is not available for strict comparison. It was also submitted that the assessee has not taken NASCOM rates as the basis in comparing the rate per hour. This indicates that assessee’s comparability under the CUP method is based on various assumptions of (a) estimating the offshore profits, (b) estimating number of employees, (c) estimating the working hours per employee per day per month, and then dividing the profit by so many assumptions/ numbers. This analysis of the assessee cannot be relied on as an external CUP. As can be seen from the above, there is no internal CUP which can be relied on in order to accept the CUP method. Therefore, in our view, the analysis undertaken by the assessee is not only faulty, but devoid of any data or proper analysis. In view of this, we have no option than to accept the TPO’s contention of TNMM as the most appropriate method.

IT(TP)A No.1336/Bang/2012 Page 10 of 32 5.8 Under section 92C of the Act, ALP has to be examined adopting the most appropriate method. Section 92C prescribes five methods – CUP, RPM, CPM, PSM and TNMM. Rule 10C provides the relevant guidelines for analyzing the most appropriate method to be selected. Under the Indian TP regulations, there is no priority or preference to any of the methods. There are also no regulations which prescribe any circumstances under which method is to be adopted, except for PSM. The above 5 methods are categorised generally as 1.Traditional methods i.e., CUP, RPM and CPM, and 2. Transactional profit methods of PSM and TNMM. In the absence of reliable data to undertake the exercise under the traditional methods, the only option is go for the transactional profit methods, when standard methods are not reasonably applied. In view of absence of reliable data either to adopt Cost Plus Method or to analyse the data on the basis of CUP method, either internal CUP or external CUP, we are of the opinion that under given facts and circumstances of the case, TNMM is the only option available to the TPO to analyse the assessee’s transactions in order to arrive at the ALP. Therefore, we reject the assessee’s contentions on CUP/CPM as most appropriate method and approve the approach taken by the TPO for analyzing transactions under TNMM.

6. Having decided the most appropriate method, the other contentions of the assessee on comparability and working of operating margins and risk adjustment require adjudication.

IT(TP)A No.1336/Bang/2012 Page 11 of 32 6.1 The first objection of the assessee is on selection of certain comparable companies and rejection of certain comparables selected by the assessee. TPO in his analysis has finally selected the following 20 companies with OP/Cost of 23.65%. The list of comparables are as under:

Sl. Name of company Net Margins as No per TPO order (before WCA) 1 Avani Cincom Technologies 25.62% 2 Celestial Biolabs 87.94% 3 Kals Information Systems Ltd. (Seg) 31.29% 4 Lucid Software Ltd. 16.50% 5 Tata Elxsi (Seg) 18.97% 6 Infosys Technologies Ltd. 40.37% 7 Wipro Ltd. (Seg) 28.45% 8 Bodhtree Consulting Ltd. 18.72% 9 Thirdware Solution Ltd. 19.35% 10 Softsol India Ltd. 17.89% 11 e-Zest Solutions Ltd. 29.81% 12 Flextronics (Aricent) 7.86% 13 iGate Global Solutions Ltd. 13.99% 14 LGS Global Ltd. 27.52% 15 Mindtree Ltd. 16.41% 16 Persistent Systems Ltd. 20.31% 17 Quintegra Solutions Ltd. 21.74% 18 R S Software (India) Ltd. 7.41% 19 R Systems International (Seg) 15.30% 20 Sasken Communication Technologies 7.58% Ltd. (Seg) Arithmetic Mean 23.65% 6.2 Assessee is objecting to the companies listed at Sl.Nos. 1 to 11. These companies are elaborately considered by the Coordinate Bench in IT(TP)A No.1336/Bang/2012 Page 12 of 32 the case of NXP Semiconductors, IT(TP)A No.1560/Bang/2012 dated 5.3.2015 as under:-

“9. Avani Cincom Technologies Ltd. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited by the assessee. We find that a co-ordinate bench of this Tribunal in the case of M/s. Curam Software International Pvt. Ltd. in dt.31.7.2013 for Assessment Year 2008-09, has remanded the matter of examination of the comparability of this company to the file of the Assessing Officer / TPO afresh; holding as under at para 9.5.1 to 9.5.2 of its order :- “ 9.5.1 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. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 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 :- (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 is comparable to IT(TP)A No.1336/Bang/2012 Page 13 of 32 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.” 9.4.2 Following the above cited decision of the co-ordinate bench of ITAT, Bangalore in the case of Curram Software International Pvt. Ltd. (supra), we direct the Assessing Officer / TPO to examine the comparability of this company afresh

IT(TP)A No.1336/Bang/2012 Page 14 of 32 by considering the observations made by the Tribunal in paras 9.5.1 to 9.5.3 of the cited order (reproduced supra). The Assessing Officer / 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 make submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly.” “10. Celestial Biolabs Ltd. 10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM software Solutions Ltd. (supra), for Assessment Year 2008-09 has held that this company be excluded from the list of comparables; holding as under at paras 9.4.1 and 9.4.2 of its order :- “ 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 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 IT(TP)A No.1336/Bang/2012 Page 15 of 32 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 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.” 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a provider of software development services.” “11. KALS Information System Ltd. 11.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 has excluded this company as a comparable, observing that it was developing software products and was not purely a software service provider and at para 10.4 thereof it was held as under :- “ 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 IT(TP)A No.1336/Bang/2012 Page 16 of 32 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 co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company’s Annual Report to establish that this company is functionally dis- similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate 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.” 11.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider.” “18. Lucid Software Ltd. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16.3 thereof is extracted hereunder :- “ 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 IT(TP)A No.1336/Bang/2012 Page 17 of 32 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 Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. 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.” 18.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different; (being engaged in software product development) from the assessee in the case on hand who is rendering only software development services. It is ordered accordingly.” “14. Tata Elxsi Ltd. 14.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that since this company being predominantly engaged in product design services, it cannot be considered comparable to a pure software service provider and excluded it from the list of comparables holding as under at paras 13.4.1 and 13.4.2 of its order, which is extracted hereunder :-

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“ 13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- “ …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider 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.” 14.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is predominantly engaged in a variety of functions like product designing services and not purely

IT(TP)A No.1336/Bang/2012 Page 19 of 32 software development services like the assessee in the case on hand. It is ordered accordingly.” “12. Infosys Technologies Ltd. 12.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 11.4 of the order has held as under :- “ 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 breakup 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.” 12.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider.” “13. Wipro Ltd. 13.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions

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Ltd. (supra) for Assessment Year 2008-09 has held that this company ought to be excluded from the list of comparables holding as under at paras 12.4.1 and 12.4.2 of its order, which is extracted hereunder :- “ 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning 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.” 13.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the TPO to exclude this company from the list of comparables as it is engaged both in software development and product development, owns IPR’s, intangibles, etc. and cannot be held as IT(TP)A No.1336/Bang/2012 Page 21 of 32 comparable to a pure software service provider, as is the assessee in the case on hand. It is ordered accordingly.” “15. Bodhtree Consulting Ltd. 15.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited by the ld. A.R. We find that this company has been excluded from the set of comparables for software development service companies in both the aforesaid decisions cited by the assessee. In Mindtech (India) Ltd., the relevant portion of the order at para 16 thereof it has been held as under :- “ 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly.”

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The relevant portion of the order in the case of CISCO Systems (India) Pvt. Ltd. (supra) at para 26.1 is extracted hereunder :- “ 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee’s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company.” 15.3.2 It is also seen that the decision relied on by the co-ordinate bench of this Tribunal in the above mentioned case; CISCO Systems (India) Pvt. Ltd. (supra), has been in relation to Assessment Year 2008-09 and therefore we find merit in the contention of the assessee that the finding

IT(TP)A No.1336/Bang/2012 Page 23 of 32 rendered in the above cited decision applies to the facts and circumstances of the case on hand, which is for Assessment Year 2008-09. In this view of the matter, following the above decision of the co-ordinate bench of the Tribunal, we direct the TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly.” “17. Thirdware Solutions Ltd. 17.3.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparables to a pure software development service provider since this company is functionally different as it is engaged in product development and earns revenue from sale of licenses and subscription. The relevant portion of the above order at para 15.3 thereof is extracted hereunder :- “ 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.” 17.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different from the assessee in the case on hand who is IT(TP)A No.1336/Bang/2012 Page 24 of 32 rendering purely software development services. It is ordered accordingly.”

”21. Softsol India Ltd. 21.4.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra), has excluded this company from the list of comparables holding as under at para 19.3 thereof :- “ 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 Pvt. Ltd. in ITA No.227/Bang/2011. 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.” 21.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, and 24/7 Customer.com Pvt. Ltd. in ITA No.227/Bang/2011, we direct the A.O / TPO to exclude this company from the list of comparables as it has RPT of 18.30% which is in excess of 15%. It is ordered accordingly.” “16. E-Zest Solutions Ltd. 16.4.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had excluded this company from the list of comparables holding that this company is into rendering of product development services and high end technical services in the category of KPO Services and therefore cannot be considered

IT(TP)A No.1336/Bang/2012 Page 25 of 32 as comparable to an assessee rendering purely software development services. The relevant portion of the order of the co-ordinate bench at para 14.4 thereof is as under :- “ 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co- ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed.” 16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the A.O. / TPO to exclude this company from the list of comparables as it is functionally different from the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly.”

6.3. Not only in the above case, in other cases given below also the same decision was taken :-

IT(TP)A No.1336/Bang/2012 Page 26 of 32

(a) 3DPLM Software Solutions Ltd. v. DCIT, IT(TP)A No.1303/Bang/2012 dated 28.11.2013. (b) Curam Software International Pvt. Ltd. v. ITO, dated 31.7.2013. (c) Invensys Development Centre India Pvt. Ltd., IT(TP)A No.1692/Hyd/2012 dtd. 12.11.2014. (d) Net Cracker Technology Solutions India Pvt. Ltd., IT(TP)A No.86/Hyd/2013 dtd. 17.6.2015. The objections of assessee are similar to the above and facts being the same, we direct the TPO to exclude them from the list of comparables. The grounds raised by the assessee are allowed accordingly.

(1) Aditya Birla Minacs IT Services Ltd. (2) Aditya Birla Minacs Technologies Ltd.

7.1 The reason for rejection of the above companies was that they failed RPT filter. The objection of the assessee was that TPO has included the reimbursement cost in operating cost. It is submitted that the reimbursement cost does not have any effect on profitability and if they are excluded, then they are within the filter range adopted by the TPO. Detailed objections and working as provided in objections to DRP at page 72 to 74 are referred in support of the contentions.

IT(TP)A No.1336/Bang/2012 Page 27 of 32 7.2 The above companies were considered by the Coordinate Bench in the case of Yodlee Infotech Pvt. Ltd. in IT(TP)A No.1538/Bang/2012 dated 30.8.2013 wherein vide para 25 and 26, the Bench directed as under:-

“25.0 Aditya Birla Minacs IT Services 25.1 This company was selected by the TPO on the basis of the search conducted by him and was proposed as a comparable company in the show cause notice issued to the assessee. The assessee had no objection to the inclusion of this company in the set of comparables. The TPO, however, excluded this company from the final set of comparables for the reason that this company failed the Related Party Transaction (RPT) filter, having 33.65% RPT. 25.2 In this appeal before us, the learned Authorised Representative contended that the reason far which the TPO has rejected this company as a comparable is incorrect since he had calculated the RPT figure at 33.6% wrongly. It is submitted that the RPT for this company is only 5.03% and that the TPO has computed the same wrongly by considering reimbursements also as RPT. In view of this, the learned Authorised Representative prayed that the TPO / A.O. be directed to include this company in the final set of comparables. 25.3 Per contra, the learned Departmental Representative supported the orders of the TPO in excluding this company from the final set of comparables on the ground that it failed the RPT filter applied by the TPO. 25.4 We have heard both parties arid perused and carefully considered the material on record. It is dear from the record that the TPQ had actually proposed this company for inclusion as a comparable based on the search process carried out by him. In the search process the TP0 had applied the RPT filter at 25%. It is seen that after having selected this company as a comparable after using the RPT filter, the TPO rejected the case on the very same issue of RPT filter. Evidently, therefore the computation of RPT is erroneous in either one of the two computations made by the TPO. We find that the TPO has not explained his computation of the RPT filter, either in the show cause notice

IT(TP)A No.1336/Bang/2012 Page 28 of 32 while selecting the company as a comparable or in the TP order while rejecting the company as a comparable. In this view of the matter, we deem it fit to remand the issue of the comparability of this company to the file of the TPO for fresh consideration after affording the assessee adequate opportunity of being heard and making submissions thereon which shall be considered by the TPO before taking a decision in the matter.

TPO. We find that the TPO has not explained his computation either in the show cause notice while selecting the company as a comparable or in the TP order while rejecting the company as a comparable. In this view of the matter we deem it fit to remand the issue of the comparability of this company to the file of the TPO for fresh consideration after affording the assessee adequate opportunity of being heard and making submissions thereon which shall be considered by the TPO before taking decision in the matter.”

7.3 Even though the assessee contended that the reimbursement costs are included in the working , the actual working of TPO is not verifiable. Therefore, following the above order of Coordinate Bench, we restore the issue to the file of TPO to examine the computation again by excluding the reimbursement cost since it do not have any profit margin and also to consider whether the companies fail the RPT filter or not. Assessee should be given due opportunity and its working should be considered after due examination. The grounds relating to this issue are allowed for statistical purposes.

8. The next objection is about exclusion of foreign exchange fluctuation from the working of operating margins of the company. This issues was already considered in the assessee’s own case in A.Y. 2006-07 as under:-

“II) Foreign Exchange gains/Loss impact (ground no.12) 5.8 The Tribunal in the case of Trilogy E-Business had directed that the foreign exchange gain or loss should be considered as operating revenue or cost while computing the operating margin of the assessee as well as the comparable. The relevant finding of the Tribunal read as follows:

IT(TP)A No.1336/Bang/2012 Page 30 of 32

“79 (B) As far as foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd. Vs. ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard.....................”. 5.8.1 In conformity with the above finding, we direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue, as the case may be, for both the assessee as well for the comparable companies.”

8.1 In conformity with the above finding, we direct the TPO to consider accordingly. Ground is allowed.

“5.11 It was the case of the assessee that the AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the assessee vis-a-vis the comparables. At this juncture, we would like to recall that a similar issue raised by the assessee in the immediately preceding assessment year has been remanded back to the files of AO/TPO by the earlier Bench to decide the issue afresh. The above direction was in conformity with the findings recorded in the case of M/s. Insilica Semiconductors

IT(TP)A No.1336/Bang/2012 Page 31 of 32

India Pvt. Ltd v. ITO [ITA No.1399/Bang/2010 for the AY 2006-07 dated 29.2.2012]. We are, therefore, of the view that the findings of the earlier Bench (supra) hold good for this AY also. It is ordered accordingly.” 9.1 In conformity with the above finding, we direct the TPO to consider accordingly. Ground is allowed.

Pronounced in the open court on this 16th day of March, 2016.