TELELOGIC INDIA PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the assessment order

dt.30.11.2011 passed under Section 143(3) rws 144C in pursuant to the

directions of the Dispute Resolution Panel (in short ‘DRP’) dt.16.8.2012 passed

2 IT(TP)A No.1599/Bang/2012 under Section 144C(5) of the Income Tax Act, 1961 (in short 'the Act') for the

Assessment Year 2008-09.

1 Assessment and reference to Transfer Pricing Officer are bad in law a) The learned Deputy Commissioner of Income-tax, Circle 12(4) [‘DCIT’ or ‘AO’] / Deputy Commissioner of Income Tax - Transfer Pricing - V [‘TPO’] erred in law and on facts in making a addition of INR 33,452,024 to the total income of the Appellant on account of adjustment to the arm’s length price with respect to software development service transaction entered into by the Appellant with its associated enterprises. b) The AO/TPO erred in law and on facts as he failed to establish that the Appellant shifted profits outside India. 2 Comparability analysis adopted by the TPO for determination of arm’s length price a) The AO/ TPO grossly erred on facts and in law in rejecting the filters and search process adopted by the Appellant in the Transfer Pricing Study. Further, the AO/TPO also erred on facts and in law by conducting a fresh benchmarking analysis in respect of captive software services provided by the Appellant and wrongly comparing the Appellant’s activities with companies operating as full-fledged entrepreneurs without considering the differences in functions performed, assets employed and risks assumed by the Appellant vis-à-vis comparable companies. b) The AO/TPO erred in law in applying arbitrary filters as criterion for rejection of companies identified by the Appellant in the Transfer Pricing Study such as (i) companies whose data for financial year (‘FY’) 2007-08 was not available, (ii) companies with software development service revenue less than 75% of total operating revenue, (iii) companies with software development service revenue less than INR 1 crore, (iv) companies with export sales less that 25% of total revenue, (v) companies with related party transactions greater than 25% of operating revenue, (vi) companies with employee cost is less than 25% of total revenues, (vii) companies with different financial year ending (i.e. other than 31 March 2008), (viii) companies having diminishing revenues / persistent losses during financial year 2007-08 and (ix) companies whose onsite income is greater than 75% of export revenues. c) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. d) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables and also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability.

3 IT(TP)A No.1599/Bang/2012 e) The AO/TPO erred in considering a set of ‘secret data’, i.e. data which was not available in public domain and not allowing the Appellant an opportunity to cross examine the data furnished by companies to whom notice under Section 133(6) of the Act were issued. 3 Erroneous data used by the AO/TPO a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant or at the time of undertaking of assessment by the TPO. b) The AO/TPO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of comparable companies. 4 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO a) The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practices, (ii) marketing expenditure, (iii) research and development expenditure, and (iv) risk profile between the Appellant and the comparable companies. 5 Variation of 5% from the arithmetic mean a) The AO/TPO erred in law in not granting the variation as per the proviso to Section 92C(2) of the Act. 6 Grant of lower deduction under section 10A of the Income-tax Act, 1961 a) On the facts and in the circumstances of the case, the learned AO has erred in reducing the travel expenses incurred in foreign currency amounting to Rs. 6,669,249 from the export turnover while computing the deduction under section 10A of the Act irrespective of the fact that the Appellant is engaged in software development activity and not rendering technical services outside India. b) On the facts and in the circumstances of the case, the learned AO has erred in reducing the telecommunication expenses of Rs. 2,983,358 from the export turnover irrespective of the fact that entire expenses cannot be attributable to the delivery of computer software outside India. c) On the facts and in the circumstances of the case, the learned AO has erred in treating the insurance expenses of Rs 9,763,523 as incurred for delivery of computer software outside India. d) Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO has erred in erroneously considering Telecommunication charges as Rs 2,983,358 as against Rs 9,763,523 and Insurance charges as Rs 9,763,523 as against Rs 359,738. e) Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO has erred in reducing the travel expense incurred in foreign currency amounting to Rs. 6,669,249; telecommunication expenses amounting to Rs. 2,983,358;

4 IT(TP)A No.1599/Bang/2012 and insurance charges of Rs 9,763,523 only from the export turnover without correspondingly reducing the said expenses from the total turnover. 7 Disallowance of interest paid to Telelogic Sweden a) On the facts and in circumstances of the case, the learned AO has erred in treating the proceeds from issue of convertible debenture issued to Telelogic Sweden as funds utilised for acquisition of assets and disallowing a proportionate interest of Rs 167,757 as capital in nature. b) Without prejudice to the above, even if it is assumed that proceeds from issue of convertible debentures were utilised for acquisition of assets, the learned AO has erred in computing the proportionate interest. c) Without prejudice to the above, the AO has erred in not providing depreciation on the aforesaid amount of proportionate interest disallowed as capital in nature. 8 Disallowance of rent equalization amount

On the facts and in the circumstances of the case, the learned AO has erred in disallowing rent equalization amount of Rs 801,624 treating the same as unascertained liability inspite of the fact that the Assessee has deducted taxes on the same. 9 Disallowance of consultancy charges paid to Telelogic Germany

On the facts and in the circumstances of the case, the learned AO has erred in disallowing Rs 1,435,960 paid towards consultancy charges to Telelogic Germany without appreciating the details submitted by the Appellant. 10 Ratio adopted for apportioning items of disallowance

On the facts and in the circumstances of the case, the learned AO has erred in considering a different ratio for apportioning the items of disallowances between STP and Non-STP Unit as against the ratio regularly adopted by the Assessee i.e. head – count basis. 11 Set off of unabsorbed depreciation of earlier years

On the facts and in the circumstances of the case, the learned AO is to be directed to allow set off of unabsorbed depreciation against the taxable income of the subject assessment year in case the additions/ disallowances made in earlier years’ assessment orders are deleted by the appellate authorities. 12 Directions issued by the Honorable DRP

The Honorable DRP has erred in law and on facts in not taking congnizance of the objections filed by the Appellant in relation to the draft assessment order issued by the AO/ TP order and confirming the draft order of the AO.

5 IT(TP)A No.1599/Bang/2012 13 Interest under section 234B of the Act The learned AO has erred in levying interest under section 234B of the Act amounting to Rs 1,173,089. 14 Penalty under section 271(1)(c) The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.

Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/TPO and upheld by Honorable DRP is bad in law and liable to be deleted.”

adjudication.

Transfer Pricing Officer (‘TPO’) by considering the various comparable

companies and confirmed by the DRP. The assessee company was

incorporated on 14.11.2000. The assessee is engaged in the business of selling

licenses for use of software product developed by its parent and group

companies. It also provides product development, after sales services,

consultancy services and training services. The assessee basically operates

three business segments i.e. (i) Distribution of software license (ii) Information

6 IT(TP)A No.1599/Bang/2012 Technology Enabled Services (ITES) and (iii) Software Development Services.

The assessee has reported the financial results for the Assessment Year under

consideration as well as segment results as worked out by the TPO after

excluding foreign exchange loss and gains as under :

Description Amount (Rs.) Operating Revenues 51,77,31,084 Operating Cost 48,24,31,816 Operating Profit 3,52,99,268 OP / TC 7.32%

Description Software Devt. IT Enabled Distribution of Services (Rs.) Service (Rs.) software licenses (Rs.) Operating 220034997 160066222 142959428 Revenues Operating Cost 196354998 135965920 48494000 Operating Profit 23679999 24100302 94465428 OP/TC 12.06% 17.72% 194.80% OP/OR 10.76% 15.06% 66.08%

The assessee has entered into international transactions during the year with

its Associated Enterprises (AEs) which are reported in 3CEB as under :

7 IT(TP)A No.1599/Bang/2012 Description Amount (Rs.) Payment of royalty for software application 4,84,94,000 Product development – Software 21,72,52,102 Development Services. Indian Global Services. 2,87,31,881 International Telemarketing 1,32,57,075 Accounting Services 19,07,807 Consultancy Fees received. 12,61,497 Consultancy Services Paid 14,35,960 Issue of debentures. 18,50,00,000 Payment of interest (paid) 23,31,506 Reimbursement of expenses (paid) 8.76,299 Recovery of expenses (received) 24,27,098

The assessee has bench marked its international transactions by adopting the

TNMM as Most Approriate Method (‘MAM’) for all three segments in its T.P.

Analysis report. The TPO accepted the transactions in respect of distribution

segment and ITES at arm’s length. However, the TP Study analysis in respect of

software development services was rejected by the TPO. Therefore, the only

dispute before us is regarding the adjustment made by the TPO in respect of

software development services segment of the assessee apart from other non-

T.P. issues. The assessee selected 17 comparables to bench mark its

international transaction of software development services as under :

8 IT(TP)A No.1599/Bang/2012 Sl.No. Name of the Company NCP NCP NCP Weighted 2005-06 2006-07 2007-08 Average (%) (%) (%) (%) 1. Akshay Software 4.02 4.49 NA 4.27 Technologies Ltd. 2. Birla Technologies Ltd. 11.10 -3.55 1.84 3.40 3. Computech International 4.52 5.88 NA 5.37 Ltd. 4. Helios & Matheson 33.42 36.88 32.82 34.36 Information Technology Ltd. 5. Indium Software (India) 27.59 2.04 NA 12.00 Ltd. 6. Kaashyap Technologies NA 57.68 16.04 17.16 Ltd. 7. Lanco Global Systems Ltd. 6.00 16.01 21.96 17.64 8. Neilsoft Ltd. 14.71 9.67 NA 11.59 9. PSI Data Systems Ltd. 1.64 6.52 6.75 5.48 10. Persistent Systems Pvt. 21.05 19.50 NA 20.14 Ltd. 11. Powersoft Global 16.19 13.19 14.30 14.40 Solutions Ltd. 12. Quintegra Solutions Ltd. 14.22 15.95 31.27 23.14 13. R S Software (India) Ltd. 14.81 12.62 10.00 12.63 14. R Systems International 22.35 7.35 16.87 14.72 Ltd. 15. Sagarsoft (India) Ltd. -11.62 23.08 6.17 7.92 16. Shree Tulsi Online.Com 3.33 15.66 NA 9.22 Ltd. 17. Vama Industries Ltd. 23.05 10.99 NA 18.50 Arithmetical Mean 13.64

9 IT(TP)A No.1599/Bang/2012 The TPO rejected 12 out of the 17 comparables selected by the assessee and

carried out a fresh search for including 15 more comparable companies.

Accordingly, the TPO has considered 20 comparable companies to determine

the ALP as under :

Sl.No. Name of the company Operating Adjusted Margin on Margin on Cost (%) Cost (%) 1. Avani Cimcon Technologies Ltd. 25.62 27.58 2. Bodhtree Ltd. 18.72 18.12 3. Celestial Labs Ltd. 87.94 80.42 4. E-Zest Solutions Ltd. 29.81 28.65 5. Flextronics Software Systems Ltd. 7.86 4.78 6. iGate Global Solutions Ltd. 13.99 10.91 7. Infosys Technologies Ltd. 40.37 37.25 8. KALS Information Systems Ltd. (Seg.) 31.29 27.54 9. LGS Global Ltd. (Lanco Global Solutions 27.52 25.22 Ltd.) 10. Mindtree Consulting (Seg.) 16.41 14.07 11. Persistent Systems Ltd. 20.31 19.32 12. Quintegra Solutions Ltd. 21.74 17.28 13. R System Intl. Ltd. (Seg.) 15.30 12.09 14. R S Software (India) Ltd. 7.41 7.41 15. Sasken Communication Technologies Ltd. 7.58 5.63 (Seg.) 16. Tata Elxsi Ltd. (Seg.) 18.97 17.43 17. Thirdware Solutions Ltd. 19.35 15.58 18. Wipro Ltd. (Seg.) 28.45 28.46 19. Soft Sol India Ltd. 17.89 14.15 20. Lucid Software Ltd. 16.50 16.47 Total : 23.65 21.43

10 IT(TP)A No.1599/Bang/2012 Accordingly, the TPO proposed T.P. Adjustment of Rs.1,83,79,242 after allowing

working capital adjustment. The assessee challenged the action of the TPO/A.O

before the DRP but could not succeed.

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 13 companies should

be excluded from the set of comparables for determination of the ALP. He has

contended that all these 13 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 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 selected by TPO the ld. AR is also seeking exclusion of M/s

11 IT(TP)A No.1599/Bang/2012 Bodhtree Consulting Ltd from the list of comparables in the 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.

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

12 IT(TP)A No.1599/Bang/2012 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 also

includes 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 service alone.

7.1 The learned Authorised Representative of the assessee has submitted

that these all 13 comparable companies have been considered by the co-

ordinate bench of this Tribunal in the case of Kodiak Network vide order

dt.5.5.2015 in ITA No.1540/Bang/2012 and therefore the comparability of these

13 companies have been covered by the findings of the Tribunal in the case of

Kodiak Network India Pvt. Ltd. (supra).

13 IT(TP)A No.1599/Bang/2012 7.2 The assessee is seeking exclusion of 2 comparable companies namely

Persistent Systems Pvt. Ltd. and Quintegra Solutions Ltd. from the list of

comparable companies which was also part of the assessee's TP Analysis and

therefore the assessee has filed additional grounds as under :

“1. The learned TPO has erred in selecting Persistent Systems Limited as a comparable in the order u/s 92CA, despite that the company is functionally not comparable to the business of the Appellant. 2. The learned TPO has erred in selecting Quintegra Solutions Limited as a comparable in the order u/s 92CA, despite that the company is functionally not comparable to the business of the Appellant.”

The learned Authorised Representative has however pointed out that out

of these 13 comparables sought to be excluded by the assessee 2 comparable

companies namely Persistent Systems Limited and Quintegra Solutions Ltd.

were also part of the T.P. Analysis of the assessee. The learned Authorised

Representative has submitted that the functional comparability of these

companies have been examined by this Tribunal in the series of decisions and

therefore the assessee has filed a petition for admission of the additional

grounds along with the grounds seeking the exclusion of these two companies

from the set of comparables. He has pointed out that this issue was also

considered by the co-ordinate bench of this Tribunal in the case of Kodiak

Network India Pvt. Ltd. (supra) and by following the decision of the Special

14 IT(TP)A No.1599/Bang/2012 Bench of the Tribunal in the case of DCIT Vs. Quark Systems Pvt. Ltd. 38 SOT

functionally comparable. Thus when these companies are not found

functionally comparable with software development services provider then

irrespective of the fact that the same were included by the assessee in the T.P.

analysis requires exclusion from the list of comparables. The learned

Authorised Representative has relied upon the decision of the co-ordinate

bench if the Tribunal in the case of Kodiak Network India Pvt. Ltd. (supra).

upon the orders of authorities below and submitted that TPO as well as DRP

has considered the objections raised by the assessee and found that these

comparable companies included in the list of set of comparables are

functionally similar to that of the software development services segment of

the assessee.

on record, we note that the TPO has determined the ALP by taking into

consideration a set of 20 comparables and computing the Arithmetic Mean-PLI

at 23.65% and after working capital adjustment at 21.43%. Thus the TPO

15 IT(TP)A No.1599/Bang/2012 proposed the TP Adjustment of the differential ALP in comparison to the

assessee's margin of 12.06%.

13 comparables which are sought to be excluded by the assessee were also

considered by the co-ordinate bench of this Tribunal in the case of Kodiak

Network India Pvt. Ltd. (supra) in paras 21 to 25 as under : “ 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: S.No. Name of the Company 1 AvaniCimcon 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

16 IT(TP)A No.1599/Bang/2012 13 Wipro Ltd (Seg.)

7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO 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)

17 IT(TP)A No.1599/Bang/2012 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 ITA No.845/Bang/2011 dt.22.2.2013. 7.3 The learned Authorised Representative further submitted that the factspertaining 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 :- (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 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

18 IT(TP)A No.1599/Bang/2012 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 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

19 IT(TP)A No.1599/Bang/2012 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 ITA No.845/Bang/2011 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. 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

20 IT(TP)A No.1599/Bang/2012 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 comparbales 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 ompany in the list of comparbales. 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.

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

21 IT(TP)A No.1599/Bang/2012 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. 9. Celestial Biolabs Ltd.

9.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007- 08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product /services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio- technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Triology EBusiness Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that –

“ ….. As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustments,the TPO has rendered this

22 IT(TP)A No.1599/Bang/2012 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 ITA No.112/Bang/2011, 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 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 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

23 IT(TP)A No.1599/Bang/2012 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 ITA No.845/Bang/2011 and Triology E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed. 10. KALS Information Systems Ltd. 10.1 This is a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter.

10.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee and ought to be rejected /excluded from the list of comparables for the following reasons:- (i) This company is functionally different from the software activity of the assessee as it is into software products. (ii) This company has been held to be functionally not comparable to software service providers for Assessment Year 2007-08 by the co-ordinate bench of this Tribunal in the assessee's own case. This company has been held to be different from a software development company in the decision of the Tribunal in the case of Bindview India Pvt. Ltd. V DCIT in ITA No.1386/PN/2010. (iii) The rejection of this company as a comparable has been upheld by co-ordinate benches of the Tribunal in the case of – (a) Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011). (b) LG Soft India Pvt. Ltd.IT(TP)A No.112/Bang/2011)

24 IT(TP)A No.1599/Bang/2012 (c) CSR India Pvt. Ltd.IT(TP)A No.1119/Bang/2011) and (d) Transwitch India Pvt. Ltd.ITA No.6083/Del/2010)

(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

25 IT(TP)A No.1599/Bang/2012 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 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 form 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 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 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 ;

26 IT(TP)A No.1599/Bang/2012 (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 ; (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 form 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.

27 IT(TP)A No.1599/Bang/2012 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. 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 ITA No.3856(Del)/2010 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

28 IT(TP)A No.1599/Bang/2012 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 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.” 13. Tata Elxsi Ltd. 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely - (a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that,

(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

29 IT(TP)A No.1599/Bang/2012 considerationi.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.

(iv) Tata Elxsi Ltd . invests substantial funds in research and development activities which has 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 form 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

30 IT(TP)A No.1599/Bang/2012 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.

31 IT(TP)A No.1599/Bang/2012 ordinate bench in the case of Capital IQ Information Systems (India) (P.) Ltd . v. Dy. CIT (International Taxation) [2013] 32 taxmann.com 21 (Hyd. - Trib.) and prayed that in view of the above reasons, this company i.e. e- Zest software Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 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 comparbales 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 software 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 software 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. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of Rs. 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :— (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

32 IT(TP)A No.1599/Bang/2012 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. 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.

33 IT(TP)A No.1599/Bang/2012 (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.

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

34 IT(TP)A No.1599/Bang/2012 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 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.

35 IT(TP)A No.1599/Bang/2012 (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. 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 an 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,

36 IT(TP)A No.1599/Bang/2012 (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, 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 intelectual 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

37 IT(TP)A No.1599/Bang/2012 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 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 form 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

38 IT(TP)A No.1599/Bang/2012 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. 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 ITA No.845/Bang/2011 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. 24. As regard the objection of the ld. DR that Quintegra Solution Ltd. has been selected by the assessee itself, we notice that the functional comparability of this company has been examined by the Tribunal in the case of M/s 3DPLM Software Solutions Ltd (supra) and it was found that the said company is engaged in the different field of services i.e. product designing and analytic services as well as in proprietary of software product and are in research and development activity which has resulted in creation of its intellectual property rights. Therefore, the said company is not functionally comparable with pure software development service activity. Once the company is found to be a non-comparable company with the assessee, the same is required to be excluded from the set of comparables even if the said company is selected by the assessee itself. This view was taken by the decision of the Special Bench of Chandigarh Tribunal in the case QUARK SYSTEMS (P.) LTD (supra). 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:

39 IT(TP)A No.1599/Bang/2012 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 10 Tata Elxsi Ltd (Seg.) 11 Thirdware Solutions Ltd (Seg 12 Wipro Ltd (Seg.) “

As regards the additional grounds raised by the assessee, the co-ordinate bench of the Tribunal also dealt with an identical issue in para 24 (supra) and therefore when the functional comparability of these two companies have

been examined by the Tribunal and it was found that these companies are not comparable with the software development services provider because of

different activities as well as engaged in the software products, R&D activities and resulting in creation of Intellectual Property Rights (IPRs) then, even if these companies are selected by the assessee in its T.P. Analysis the same shall

40 IT(TP)A No.1599/Bang/2012 be excluded from the comparables. The comparability of these companies was

already tested by this Tribunal, then the same cannot be included in the list of

comparables. Accordingly, by following the earlier order of the Tribunal as well

as Special Bench decision in the case of Quark Systems Pvt. Ltd. (supra). We

admit the additional grounds raised by the assessee. In view of the findings of

the co-ordinate bench of the Tribunal in the case of Kodiak Network India Pvt.

Ltd. (supra), we hold that 12 companies out of 13 sought by the assessee are

required to be excluded from the list of comparables where as the company

Bodhtree Consulting Ltd. is accepted as a good comparable of software

development services provided by the assessee. Accordingly, we direct the

TPO/A.O to exclude 12 companies as mentioned in para 25 of the order of the

co-ordinate bench (supra) from the set of comparables and recomputed the

ALP after considering the claim of risk adjustment as well as the benefit of

tolerance range of + / - 5% as per the proviso to section 92C(2).

foreign currency from the export turnover.

material on record. At the outset, we note that this issue is covered by the

41 IT(TP)A No.1599/Bang/2012 decision of the Hon'ble jurisdictional High Court of Karnataka in the case of CIT

V Tata Elxsi Ltd & Others (2011) 247 CTR 334 (Karnataka) wherein it has been

held that while computing the exemption u/s 10A, if the export turnover in the

numerator is to be arrived at after excluding certain expenses, the same should

also be excluded from the total turnover in the denominator. The relevant

finding of the Hon’ble jurisdictional High Court reads as follows:-

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

……..In section 10A, not only the word ‘total turnover’ is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In

42 IT(TP)A No.1599/Bang/2012 the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same”.

Respectfully following the judgment of Hon'ble jurisdictional High Court, we

direct the A.O. to exclude travel expenses incurred in foreign currency from the

total turnover as well.

Sweden (AE). The Assessing Officer noted that the assessee has acquired fixed

43 IT(TP)A No.1599/Bang/2012 asset to the tune of Rs.1,31,52,489 during the financial year relevant to the

Assessment Year under consideration. The Assessing Officer held that the

assessee does not have required funds for acquiring the fixed asset.

Accordingly, the Assessing Officer disallowed proportionate interest by applying

the SBI prime lending rate of 12.75% on the amount invested for the purchase

of asset. Accordingly, the A.O. has computed the disallowance at Rs.1,67,757

as capital in nature. The DRP has confirmed the action of the Assessing Officer.

submitted that the assessee has issued convertible debentures to Telelogic

Germany and the proceeds from the issue are utilized for working capital

purpose and no fixed assets have been acquired by utilizing the borrowed fund.

Thus the Assessing Officer is not justified in disallowing the proportionate

interest on account of purchase of fixed asset. He has further submitted that

the assessee has an equity capital of Rs.4,94,170 and reserves and surpluses of

Rs.2,48,84,256. Therefore these reserves were sufficient to cover the funds for

acquisition of fixed asset. Alternatively, the learned Authorised Representative

has submitted that the disallowance if any on account of purchase of fixed

asset should be restricted only in respect of the fixed assets acquired after

44 IT(TP)A No.1599/Bang/2012 issue of convertible debentures as there is no scope of utilizing the borrowed

fund prior to the issue of convertible debenture. Thus the learned Authorised

Representative has submitted that the disallowance if any on account of

interest expenditure to be made only in respect of the fixed assets added after

the issuance of convertible debentures.

submitted that the assessee has failed to produce the relevant evidence and

details to show that the assessee has not utilized the borrowed fund prior to

acquisition of fixed assets.

material on record. The learned Authorised Representative has submitted that

the addition to fixed assets after issuance of convertible debentures in July,

2007 is only of Rs.53,96,000 out of the total addition of Rs.1,31,52,489 which

was considered by the Assessing Officer for disallowance of interest.

assets was made out of its own free reserves, however we find that there is a

substance in the alternate plea of the assessee that the addition if any can be

made only in respect of addition to the fixed assets post issuance of debentures

45 IT(TP)A No.1599/Bang/2012 because prior to the receipt of the debenture proceeds the borrowed fund

cannot be utilized for the purpose of purchasing the asset. Accordingly, we

direct the Assessing Officer to verify the exact date of acquisition of the fixed

assets and then to decide the issue of disallowance of interest only in respect of

the fixed assets acquired post issuance of debentures or payment of which is

made post issuance of debentures.

18.1 Ground No.8 is regarding disallowance of rent equilisation amount. The

Assessing Officer has noted that the assessee has debited an amount of

Rs.5,47,46,191 towards rent expenditure. On verification of record, it was

found that an amount of Rs.8,01,624 is a provision which has not been added

back to the total income of the assessee. The Assessing Officer disallowed a

sum of Rs.5,21,056 pertaining to STPI and Rs.2,80,568 to non-STPI unit on the

ground that it is an uncertain liability. The assessee raised the objection before

the DRP and relied upon the judgment of Hon'ble jurisdictional High Court in

the case of M/s. Prakash Leasing Limited as well as the decision of Hon'ble

Delhi High Court in the case of Virtualsoft System Ltd. The DRP rejected the

objection of the assessee on the ground that the department has not accepted

the decision of the Hon'ble jurisdictional High Court in the case of Prakash

46 IT(TP)A No.1599/Bang/2012 Leasing Limited (supra). Before us, the learned Authorised Representative of

the assessee has submitted that the DRP has rejected the claim of the assessee

only because the department has not accepted the decision of the Hon'ble

jurisdictional High Court where as the decision of the Hon'ble jurisdictional High

Court is binding on the appellate authorities.

18.2 On the other hand, the learned Departmental Representative has relied

upon the orders of authorities below.

on record, we note that the DRP has rejected this objection of the assessee in

para 22.4 as under :

“22.4 The Panel has examined the issue and has also taken on record the arguments made by the assessee in the course of assessment proceedings as also in the course of DRP proceedings. The Panel also notes that the assessee places strong reliance in the ratio upheld by the Hon'ble Karnataka High Court in its order dt.27.2.2012 in the case of M/s. Prakash Leasing Ltd. (ITA No.301, 302 & 491 of 2007) as also Hon'ble Delhi High Court decision dt.7.2.2012 in Virtual Soft System Ltd. (ITA Nos.216, 398, 403, 404 & 680 of 2011) both are holding the allowability of such a claim. It is in this context the Panel notes that the Department has not accepted the decision of the Hon'ble High Court of Karnataka and is agitating the issue by way of an appeal before the Hon'ble Supreme Court and hence the Panel confirms to such a stand and holds that the view taken by the A.O. calls for no interference and as such this ground of appeal is rejected.”

47 IT(TP)A No.1599/Bang/2012 20. It is clear that the DRP has not disputed that this is covered by the

judgment of Hon'ble jurisdictional High Court as well as Hon'ble Delhi High

Court wherein this issue has been decided in favour of the assessee. The only

ground for not accepting the claim of the assessee is that the department has

not accepted the judgment of Hon'ble jurisdictional High Court and filed an

appeal before the Hon'ble Supreme Court. Since nothing has brought before us

to show that these judgments of Hon'ble jurisdictional High Court and Hon'ble

Delhi High Court have either been reversed or the same has been stayed by the

Hon'ble Supreme Court therefore, in the absence of any contrary judgment of

the Hon'ble Supreme Court, the judgment of Hon'ble jurisdictional High Court

is binding on this Tribunal as well as on the DRP. Accordingly, we allow the

claim of the assessee on this issue regarding rent equilisation amount.

that the TPO has found this payment of consultancy charges at arm’s length

however, the Assessing Officer disallowed the consultancy charges on the

ground that the assessee has failed to prove that the service was rendered by

the AE. The DRP has directed the Assessing Officer to decide this issue afresh

after affording an opportunity to the assessee in para 23.4 as under :

48 IT(TP)A No.1599/Bang/2012 “ 23.4 The Panel has carefully considered the issue in dispute and the facts relating thereto. It observes that the facts as given by the Assessing Officer with regard to furnishing of evidence, bills, etc. are contested by the assessee. The Panel has also taken into account a further report in the matter furnished by the Assessing Officer on the issue dt.1.5.2012. The Assessing Officer in his report has reiterated the facts mentioned in the draft assessment order and has asserted that despite as many as four opportunities, the requisite information required has not been filed by the assessee. What has merely been filed was a copy of e-mail communication which does not substantiate the services rendered as required by the Assessing Officer. The Assessing Officer has further asserted that the assessee was afforded as many as 15 opportunities to substantiate its claim to which it has not complied with. In view of the same the Panel therefore deems it appropriate to direct the Assessing Officer to afford a final opportunity in the interest of justice and come to a conclusion thereon relating to the disallowance of impugned amount. This ground is disposed off subject to the above direction.”

Thus when the DRP has already directed the Assessing Officer to afford an

opportunity to the assessee to present its case and relevant evidence, then we

do not find any reason to interfere with the finding of the DRP. The learned

Authorised Representative has submitted that the Assessing Officer has not

given effect to the directions of the DRP. Accordingly, we direct the Assessing

Officer to reconsider this issue after giving an opportunity of hearing to the

assessee.

assessee for apportionment of the common expenses. The assessee has

49 IT(TP)A No.1599/Bang/2012 allocated the common expenses on the basis of head count to both STPI and

non-STPI units. Based on the head counts for STPI and non-STPI the assessee

has adopted apportionment of common expenses in the ratio of 222 and 42

respectively. The Assessing Officer did not accept the ratio adopted by the

assessee and applied the turnover ratio for the purpose of apportionment of

common expenses. The assessee challenged the action of the Assessing Officer

before the DRP but could not succeed. However, the DRP directed the

Assessing Officer to revisit the issue and come to a conclusion on the claim of

the assessee.

consistently allocating the common expenses on the basis of head counts which

has been accepted by the Assessing Officer in the past. However, for the year

under consideration, the Assessing Officer has decided to change the basis of

apportionment and allocated the expenses on the basis of turnover. He has

thus contended that the action of the Assessing Officer is against the rule of

consistency. In support of his contention he has relied upon the judgment of

Hon'ble Delhi High Court in the case of CIT Vs. EHPT India Pvt. Ltd. in ITA

No.1172/Bang/2008 and submitted that the Hon'ble High Court has held that

50 IT(TP)A No.1599/Bang/2012 allocation method consistently accepted by both the tax payer and tax

department in the past and having regard to the nature of the business and

other relevant factor. If it is reasonable method and the allocation does not

distort the profits then it should not be disturbed.

upon the orders of authorities below and submitted that the turnover basis is

more reasonable than the head count.

record, we find that the common expenses are invariably in the nature of head

office expenses and on account of salary of the office staff and other expenses

relating to head office. Therefore these common expenses have no direct or

proximate relation with the ratio of the turnover. When the assessee has been

consistently following the apportionment of common expenses on the basis of

head count ratio then without giving any finding that this method of

apportionment resulting in distortion of profits, the Assessing Officer is not

justified in rejecting the same and applying some other method. In view of the

above facts and circumstances and following the rule of consistency, we decide

51 IT(TP)A No.1599/Bang/2012 this issue in favour of the assessee and delete the addition made by the

Assessing Officer.

26.1 Ground No.11 is regarding set off of unabsorbed depreciation of earlier

year for computation of deduction under Section 10A.

26.2 We have heard the rival submissions as well as considered the relevant

material on record. At the outset, we note that this issue is now covered by the

judgment of Hon'ble jurisdictional High Court in the case of CIT vs. Yokogawa

India Ltd. & others (341 ITR 385). The co-ordinate bench of this Tribunal in the case of Flextronics Technologics India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1219/Bang/2011 Dt.23.11.2015 has considered an identical issue inparas 10.1 to 10.5 as under : “ 10.1 The learned AR of the assessee has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Yokogawa India Ltd. & others (341 ITR 385) as well as the decision in the case of CIT vs. M/s.Auringene Discovery Technologies Ltd. in ITA No.549/2013 dated 05/09/2014 and submitted that the Hon’ble High Court has reiterated the view taken in the case of Yokogawa India Ltd.(supra). He has also relied upon the decision of this Tribunal dated 30/4/2014 in the case of CIT vs. M/s.Biocon Ltd. in ITA Nos.248, 368 to 371 & 1206/2010. 10.2 On the other hand, learned Departmental Representative has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Himatsinghika Seide Ltd. (156 Taxman 151) and submitted that that the decision of the jurisdictional High Court has been confirmed by the Hon’ble Supreme Court and the SLP filed by the assessee has been dismissed. 10.3 We have considered the rival submissions as well as the relevant material on record. There is no dispute that the Hon'ble jurisdictional High Court in the case of Himatsinghika Seide Ltd. (supra) had decided this issue in favour of the revenue and against the assessee. However, it is pertinent to note that the said decision of the Hon'ble jurisdictional High Court was in respect of the

52 IT(TP)A No.1599/Bang/2012 dispute for the assessment year 1994-95 and there is an amendment in the provisions of sec.10A and 10B of the Act vide Finance Act, 2000 w.e.f. 1/4/2001. By virtue of the amendment and substitution of provisions of sec.10A and 10B, the incentive u/s 10A and 10B was no longer in the nature of exemption but it is in the nature of deduction. By considering the amendment/substitution of sec. 10A and 10B vide Finance Act, 2000 w.e.f. 1/4/2001, Hon'ble jurisdictional High Court vide judgment in the case of Yokogawa India Ltd.(supra) has held in paras.16 to 23 as under: “16. The substituted s. 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of the total income". It may be noted that when s. 10A was recast by the Finance Act, 2001 (sic- 2000), the Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do not form part of total income. If the Parliament intended that the relief under s. 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses the sections like 80HHC, 80-IA, etc. The Parliament was aware of the various restricting and limiting provisions like s. 80A and s. 80AB which were in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates the intention of Parliament that it is to be regarded as an exemption and not a deduction. The Act of the Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. The Parliament despite being conversant with the implications of this chapter, has consciously chosen to retain s. 10A in Chapter III. 17. If s. 10A is to be given effect to as a deduction from the total income as defined in s. 2(45), it would mean that s. 10A is to be considered after Chapter VI-A deductions have been exhausted. The deductions under Chapter VI-A are to be given from out of the gross total income. The term "gross total income" is defined in s. 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not include s. 10A. In other words, the gross total income would be arrived at after considering s. 10A deduction also. Therefore, it would be inappropriate to conclude that s. 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted.

53 IT(TP)A No.1599/Bang/2012 18. It is after the deduction under Chapter VI-A that the total income of an assessee is arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions. 19. From the aforesaid discussion it is clear that the income of 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level. 2nd substantial question of law 20. Prior to the introduction of sub-s. (6) of s. 10A and s. 10B by the Finance Act, 2000, which came into effect from 1st April, 2001, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year, sub-s. (2) of s. 32, cl. (ii) of sub-s. (iii), s. 32A cl. (ii) of sub-s. (3) of s. 32A, cl. (ii) of sub-s. (2) of s. 33 and sub-s. (4) of s. 35 of the Act or the second proviso to cl. (ix) of sub-s. (1) of s. 36 shall not be applicable in relation to any such allowance or deduction. Similarly no loss as referred to in sub-s. (1) or in s. 72 or sub-s. (1) or sub-s. (3) of s. 74 insofar as such loss relates to the business of the undertaking was permitted to be carried forward or set off where such loss relates to any of the relevant assessment years. 21. It is in this background the Finance Act, 2003 was introduced by inserting the words "the year ending upto the first day of April, 2001", for that in cls. (1) and (2) of sub-s. (6) restricting the disallowance only upto the first day of April, 2001 and granting the benefit, of those provisions even in respect of units to which ss. 10A and 10B are applicable. The Finance Act, 2003, amended this sub-section with retrospective effect from 1st April, 2001 by lifting the embargo in the aforesaid clauses in respect of depreciation and business loss relating to the asst. yr. 2001-02 onwards. The amendment indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post tax holiday. This is

54 IT(TP)A No.1599/Bang/2012 supported by Circular No. 7 of 2003 [(2003) 184 CTR (St) 33] wherein the board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dt. 5th Sept., 2003 reads as under : "20. Providing for carry forward of business losses and unabsorbed depreciation to units in Special Economic Zones and 100 per cent export oriented units. 20.1 Under the existing provisions of ss. 10A and 10B, the undertakings operating in a Special Economic Zone (under s. 10A) and 100 per cent export oriented units (under s. 10B) are not permitted to carry forward their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the existing tax incentives in respect of such units sub-s. (6) in ss. 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation. The amendments have been brought into effect retrospectively from 1st April, 2001 and have been made applicable to business losses or unabsorbed depreciation arising in the asst. yr. 2001-02 and subsequent years." 22. It is interesting to note that such relaxation has not been made in s. 10C which provides for exemption in respect of profits of certain undertakings in north eastern region. This makes clear the legislative intention of providing relaxation wherever it deems fit and in the present case, such relaxation has been made in s. 10A but not in s. 10C. 23. It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that the notional computation of business income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to provisions of ss. 70, 71, 72 and s. 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday

55 IT(TP)A No.1599/Bang/2012 period should be determined so that the same may be set off against the income post tax holiday period. 10.4 We further note that this view has been reiterated by the Hon'ble jurisdictional High Court in the case of M/s.Aurigene Discovery Technologies Ltd., in ITA No.549/13. A similar view was considered by the co-ordinate bench of this Tribunal in the case M/s.Biocon Ltd. (supra) and held in para.23 to 26 as under: “23. We have given a very careful consideration to the rival submissions. The issue raised by the assessee in ground no.21 is identical to the ground raised by the assessee in Biocon (supra). The facts of the case before the Tribunal in the case of Biocon (supra) were that the assessee during the previous year had four units which were entitled to claim deduction u/s. 10B of the Act viz., CMZ Unit, SAP Unit, RHI Unit and IFP Unit. The assessee had claimed deduction u/s. 10B of the Act in respect of the aforesaid units totaling Rs.157,22,33,066 which is the sum total of deduction u/s. 10B for the four units as follows:- (1) CMZ Unit : 6,87,70,229 (2) SAP Unit : 76,60,29,880 (3) RHI Unit : 52,42,56,278 (4) IFP Unit : 21,31,76,679 Total 157,22,33,066 The assessee had non-10B units as well. In those non-10B units, there was a loss of Rs.105,92,19,172. In the return of income filed by the assessee, the assessee sought to carry forward the loss of non-10B units for set off against the profits of non-10B units in the subsequent assessment years. The AO firstly noticed that there was income from other sources to the extent of Rs.4,71,15,896 and such had to be set off against the loss of the non-10B units. Accordingly, the AO held that the loss of the non-10B units that had to be considered for carry forward would be Rs.101,21,03,280. Thereafter, the AO was of the view that income of the 10B units had to be set off against the loss of the non-10B units and if it is so set off, there will be no loss that needs to be carried forward. In coming to the aforesaid conclusion, the AO expressed the opinion that provisions of section 10B are deduction provisions and therefore effect will have to be given to the provisions of section 72 of the Act, even in respect of profits of the 10B unit. Accordingly, the claim of the assessee for carry forward of loss of non- 10B unit was not allowed by the AO. On appeal by the assessee, it was contended that the provisions of section 10A and section 10B are exemption provisions and therefore the profit of 10A and 10B units will not enter the computation of total income at all and therefore the profits of these units need not be set off against the loss of non-10B

56 IT(TP)A No.1599/Bang/2012 unit by invoking the provisions of section 72 of the Act. The CIT(Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Himatsingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon’ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon’ble Court took the view that the aforesaid provision was only an exemption provision. The CIT(Appeals) noticed that the aforesaid decision was followed by the ITAT Bangalore Bench in the case of Intelnet Technologies India Pvt. Ltd. v. ITO, ITA No.1021/Bang/2009 dated 12.3.2010. Similar view expressed by the Delhi Bench of the Tribunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DEL) was also referred to by the CIT(A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT, 120 TTJ 956. The CIT(A) found that in the case of Global Vantage Pvt. Ltd. (supra) decided by the Delhi Tribunal this decision has been held to be not in tune with the decision of the Hon’ble High Court of Karnataka in the case of Himatsingike Seide Ltd. (supra). The CIT(A) also referred to the decision of the Chennai Bench of the Tribunal in the case of Sword Global India Pvt. Ltd. v. ITO, 306 ITR 286 (AT), wherein the provisions of section 10A and 10B have been held to be deduction provisions and not exemption provisions. For all the above reasons, the CIT(Appeals) confirmed the order of the Assessing Officer. Against the order of the CIT(A), the Assessee was in appeal before the Tribunal. 25. This Tribunal dealt with the issue in the following words : 63. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. This issue has already been settled by the Hon’ble Karnataka High Court in the case of Yokogawa India Ltd. (supra). The Hon’ble Karnataka High Court in the case of Yokogawa (supra) had to deal with two substantial question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eligible unit on which deduction u/s.10B was to be allowed. The Hon’ble Court in para 10 to 20 of its judgment dealt with the issue. The Hon’ble Court noticed

57 IT(TP)A No.1599/Bang/2012 that Sec.10-A(1) of the Act (which is in pari materia with Sec.10-B of the Act) read as follows:

“10B. Special provisions in respect of newly established undertaking in free trade zone etc.,-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the Previous-year in which the under- taking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :” (emphasis supplied) 64. The expression “Deduction” and “shall be allowed from the total income of the Assessee” used in the aforesaid provisions was considered by the Hon’ble High Court and it held in para 13 to 15 of its judgment that the expression “ shall be allowed from the total income of the Assessee” does not mean total income as defined u/s.2(45) of the Act but that expression means “profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. The Hon’ble Court thereafter held that though the expression used in Sec.10A was “Deduction” but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon’ble Court’s judgment.

58 IT(TP)A No.1599/Bang/2012 10A/10B unit. We hold accordingly and allow the relevant grounds of appeal of the Assessee. 66. We may also observe that the Hon’ble Karnataka High Court’s decision in the case of Himatasingike Seide (supra) has held that unabsorbed depreciation (and business loss) of same (s. 10A/10B) unit brought forward from earlier years have to be set off against the profits before computing exempt profits. The assessee in that case set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred “exemption” for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set- off against income from other sources. It was also claimed that the profits had to be computed on a “commercial” basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the order of the CIT. On appeal by the department, the High Court in CIT Vs. Himatasingike Seide Ltd. 286 ITR 255 (Kar) reversed the order of the Tribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. In Civil Appeal No.1501 of 2008 dated 19.9.2013 against the aforesaid decision of the Hon’ble Karnataka High Court, the Hon’ble Supreme Court observed as follows while dismissing the appeal:-

“Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly.” 67. Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S.

59 IT(TP)A No.1599/Bang/2012 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday which means that they need not be so set off as mandated in the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar), it was held that even after s. 10A/10B were converted into a “deduction” provision w.e.f 1.4.2001, the benefit of relief u/s 10A/10B is in the nature of “exemption” with reference to “commercial profits” and that as the income of the s. 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise. Therefore the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide (supra) will not apply to the facts of the present case.”

60 IT(TP)A No.1599/Bang/2012 27. Another ground raised by the assessee is regarding levy of interest under

Section 234B which is mandatory and consequential in nature.

under Section 271(1)(c) of the Act which is premature at this stage.

Order pronounced in the open court on 9.3.2016.

Sd/- Sd/- (ABRAHAM P GEORGE) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp

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

(True copy) By Order

Asst. Registrar, ITAT, Bangalore