HEWLETT- PACKARD GLOBALSOF PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER I.T(TP).A No.1031/Bang/2011 (Assessment Year : 2007-08) Hewlett- Packard (India) Globalsoft P. Ltd, Plot No.39/40, Electronic City – Phase-II Hosur Road, Bangalore 560 100 ..Appellant PAN : AAACD4078L v. Deputy Commissioner of Income-tax, Central Circle -11(4), Bangalore .. Respondent Assessee by : Shri. Ajit Kumar Jain, CA Revenue by : Shri. G. R. Reddy, CIT – DR-I Heard on : 01.09.2015 Pronounced on : 23.09.2015 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :

In this appeal filed by the assessee, directed against an order dt.30.08.2011 of the AO passed pursuant to the directions u/s.144C of DRP, it has filed a set of concise grounds in lieu of the original grounds. Assessee has also filed a set of additional grounds in which it seeks exclusion of certain comparables appearing in the list of comparables by the TPO, selected from assessee’s own comparables appearing in its TP study.

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and the additional grounds are considered then the original grounds need not be reckoned. For the admission of additional ground, Ld. AR relied on the decision of Special Bench in the case of DCIT v. Quark Systems P. Ltd [(2011)

42. DTR 414]. According to him, four of the comparables considered by the TPO, namely, Accel Transmatics Ltd (seg), Quintegra Solutions Ltd, Sasken Communication Technologies Ltd (Seg) and Tata Elxsi Ltd (seg), required to be excluded though these appeared in the original list of the assessee itself. As per the Ld. AR, TP issues being evolving in nature, by virtue of the decision of Special Bench in Quark Systems P. Ltd (supra), assessee could not be disabled from pleading exclusion of certain comparables only for a reason that it appeared in its own list.

3. Per contra, Ld. DR submitted that the additional grounds sought exclusion of comparable selected by the assessee itself and if admitted, required to be remitted back to the AO.

4. We have perused the orders and heard the rival contentions. In so far as the additional grounds are concerned, in our view, decision of Quark Systems P. Ltd, would go in favour of the assessee. It was held therein that transfer pricing was an evolving area and therefore an assessee, just because it had included certain comparables in its own list, could not be held back from seeking exclusion of such comparables, once proper reasons for seeking such exclusion were shown by it. Accordingly we are inclined to admit the additional grounds.

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Functions : HPGS offers a wide range of professional software development services and IT services through 4 distinct service offerings; IT(TP)A.1031/Bang/2011 Page - 4

Application Services The Application Services business unit offers solutions designed to leverage the internet to lower costs of doing business and specializes in providing web-centric application development and management services. The business unit's offerings are to develop "ground up" applications, enhance current applications, provide round the clock support through a mix of on-site as well as off-shore maintenance models, and provide a range of skills to suit every need. The services of Applications Services business unit can be broadly categorized into Customer Application Development, Packaged Application Services, Application Management, and Application Integration. Technology Services: HPGS also provides Technology Services in the following areas: Platform and Middleware Engineering, Virtual R&D, Embedded Systems Engineering and Quality Process Consultancy. High end skills, processes, tools, and, methodologies fuel the service offerings. IT Operations: HPGS helps customers in building infrastructure, network management, network deployment, security systems and database management. This group supports over 5.500 products and is geared to meet stringent service level expectations of its customers. HPGS has expertise in the networking arena and the capability to implement and manage technical-assistance centres ('TAC5"), remote management centres ("RMCs") and satallite data centres ("SDCs"). During the financial year 2004-05, HP decided to create a consolidated India based Global Delivery model for IT services. HPGS was made pall of the HP Global Delivery organisation pursuant to this decision. Consequently, HPGS now functions as a contract service provider to HP as opposed to an independent risk bearing entity.

HPGS provides the above services to its associated enterprises under a General Services Agreement between FIPGS and HP Co. While providing the above services, HPGS undertakes the following functions:

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Management Top level management functions including determination of business activities,preparation of strategies, establishment of operating procedures, etc are performed by HPGS associated enterprises. HPTS's role is limited to management of its day to day operations. Marketing & Business Development The marketing and business development function of HPGS is limited to its customer relationship group which coordinates with the sales team of its associated enterprises to secure business assignments. The sales teams approach the HPGS customer relationship group for help in pricing and bidding for assignments only when they consider that HPGS may add value to a bid. HPGS does not attempt to identify or secure new projects individually. Intellectual Property HPGS associated enterprises retain ownership of all intellectual property that may he developed by HPGS in the course of its software development function. FIPGS is not compensated separately. Other support function Other support functions such as administration, human resources, Finance, accounting for treasury functions, administration, infrastructure management, etc are undertaken by HPGS. However, these are integrated with HP's structure and entail some amount of reporting within H P.

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12. Software development and maintenance segment is first considered by us. Assessee had selected TNMM for its TP study and had selected 46 comparables through a search done under prowess and capitaline data base. Average PLI of these 46 comparables came to 12.52% and as per assessee, profit margin of 7.46% was falling within + / - 5% of the PLI of the comparables, after adjustment for working capital. TPO while accepting TNMM as the most appropriate method for analysing the international transactions of the assessee, however held that out of the 46 comparables considered by the assessee, 38 were to be rejected for a reason that they either failed criterion like RPT, e- revenue filter, on-site revenue filter and functional dissimilarities. Eight comparables accepted out of the list provided by the assessee included Accel Transmatics Ltd (seg), Quintegra Solutions Ltd, Sasken Communication Technologies Ltd (Seg) and Tata Elxsi Ltd (seg), which assessee is now seeking exclusion. TPO thereafter made his own analysis of the data bases mentioned IT(TP)A.1031/Bang/2011 Page - 7 above and zeroed in on 26 comparables including the eight selected from the list of assessee. List of such comparables and their average PLI is given below :

IT(TP)A.1031/Bang/2011 Page - 8 Thus TPO recommended an adjustment of Rs.1,51,26,13,104/-. When a proposal on the above lines was made by the AO. Assessee chose to move the DRP.

17. For seeking exclusion of Flextronics Software Systems Ltd (seg) and Sasken Communication Technologies Ltd (seg), Ld. AR placed reliance on the decision of Delhi Bench of the Tribunal in the case of Motorala Solutions (India) P Ltd v. ACIT [ITA.5637/Del/2011, dt.14.08.2014]. Ld. AR submitted that the said decision was for the very same assessment year and for the very same software development segment. Further according to him, while selecting Flextronics Software Systems Ltd (seg), TPO had relied on information received from the said company based on a summons issued u/s.133(6) of the Act. According to him, the information provided were contradictory to the results as per the annual report of the said company. Relying on the annual report of the said company placed at paper book page 124, Vol-II, Ld. AR submitted that the audited accounts of Flextronics Software Systems Ltd (seg) was for nine months period, ending on 31.03.2007. According to him when there were differences between the audited accounts given in annual report which were available in public domain and replies given to notice u/s.133(6), the former alone could be given credence. According to him Flextronics Software Systems Ltd (seg) also had considerable product development activities. It had not segmented its software development service and products and without such segmentation according to him, it would be inappropriate to consider Flextronics Software Systems Ltd (seg) as a proper comparable.

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18. Vis-a-vis R Systems International Ltd (seg), reliance was placed on the decision of Mumbai bench in the case of ACIT v. Hapag Llyod Global Services P. Ltd [ITA.8499/Mum/2010, dt.28.02.2013]. According to him the said company was also following calendar year as its financial year and hence could not be considered as a proper comparable. Reliance was placed on the copy of annual report of the said company placed at page 599.

19. Per contra, Ld. DR submitted that in so far as Flextronics Software Systems Ltd (seg) was concerned, its product revenue prima facie was very minimal. Though segmental result might not be there, as per the Ld. DR, TPO had obtained the required information, on 133(6) notice issued by him and this was reproduced by the TPO at page 123 of his order. Services income came to Rs.7368 millions whereas the product revenues were only Rs.896 millions. Thus according to him the argument of assessee that segmental results were unavailable for the said company was incorrect. Further according to him, once information received on issue of notice u/s.133(6) was put to the assessee and assessee was given a chance to answer the queries raised, it could not say that only the annual reports and audited accounts should be considered for the comparability analysis.

20. Vis-a-vis Mega Soft Ltd, Ld. DR submitted that the Tribunal decision relied on by the assessee itself had recommended the inclusion of the said company as a good comparable, after segmenting its result.

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21. As for R Systems International Ltd (seg), Ld. DR submitted that the decision of Mumbai bench in the case of ACIT v. Hapag Llyod Global Services P. Ltd [ITA.8499/Mum/2010, dt.28.02.2013] (supra) relied on by the assessee was for F. Y. 2005-06.

48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: “In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee’s claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of IT(TP)A.1031/Bang/2011 Page - 14 comparables for the purpose of determining TNMM margin.”

20. Respectfully following the decision of the Tribunal in similar set of facts, these companies are directed to be excluded from the list of comparables.” Avani Cimcon Technologies Ltd. ii)

39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company’s website, which reveals that this company has developed a software product by name “DXchange”, it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT – wherein the Tribunal accepted the assessee’s contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- “7.8 Avani Cincom Technologies Ltd. (‘Avani Cincom’):

IT(TP)A.1031/Bang/2011 Page - 15 Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis.” It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable.

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42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- • In the Director’s Report (page 20 of PB-Il), it is stated that “the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act.” • As per the Notes to Accounts - Schedule 15, under “Deferred Revenue Expenditure” (page 31 of PB-II), it is mentioned that, “Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred.” An amount of Rs. 11,692,020/- has been debited to the Profit and Loss Account as “Deferred Revenue Expenditure” (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R&D activities is bad in law.

44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has IT(TP)A.1031/Bang/2011 Page - 18

developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45.From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO’s order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with IT(TP)A.1031/Bang/2011 Page - 19 business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. iv) E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in ‘e-Business Consulting Services’, consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing (‘KPO’) services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company’s website which should be considered while evaluating the company’s functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions 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.

IT(TP)A.1031/Bang/2011 Page - 20 14.4 We have heard the rival submissions and perused and carefullyconsidered 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 Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q InformationSystems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. /TPO is accordingly directed. v) Helios & Matheson Information Technology Ltd : 16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment.

12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs.200 Crores.

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(iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011)

12.3 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 operating 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.

12.4 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. The argument put forth by assessee's is 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. vii) & viii) M/S.Ishir Infotech Ltd. And Lucid Software Ltd :

20. As far as comparable companies listed at Sl.No.11 & 14 of the final list of comparable companies chosen by the TPO viz., M/S.Ishir Infotech Ltd. And Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of IT(TP)A.1031/Bang/2011 Page - 24

software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supra) are one and the same. This fact would be clear from the fact that the very same 26 companies were chosen as comparable in the case of the Assessee as well as in the case of First Advantage Offshore Services Pvt.Ltd.(supra). The following were the relevant observations in the case of First Advantage Offshore Services Pvt.Ltd.(supra): 22. The learned counsel for the assessee submitted that these two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also.

23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decision of the co-ordinate bench, we hold that these two companies are also to be excluded.

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46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: “16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.” Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.

TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. x) Persistent Systems Ltd. 17.1.1 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. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in ‘Outsourced Software Product Development Services’ for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. 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 IT(TP)A.1031/Bang/2011 Page - 27 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 Telecordia Technologies India Pvt. 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. xi) Quintegra Solutions Ltd. 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. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand.

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(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 solutions (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 intellectual property. Accordingly, some of the products developed by the company …………… have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks.” (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO’s own filter since there have been acquisitions in this case, as is evidenced from the company’s Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 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. 18.3.1 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.

IT(TP)A.1031/Bang/2011 Page - 29 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 thecase of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) 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. 18.3.2 We also find from the Annual Report of Quintegra Solutions 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. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions 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.”

27. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. xii) Tata Elxsi Ltd. 14.1 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.

14.2 Before us, it was reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and (c) visual computing labs.

IT(TP)A.1031/Bang/2011 Page - 30

In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables.

14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables.

14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by the assessee.

14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- “ …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable portion.”

As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be IT(TP)A.1031/Bang/2011 Page - 31 considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.”

given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.” xiv) Wipro Limited 13.1 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 or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables.

13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO’s own filter of rejecting companies with consolidated financial statements.

13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables.

13.4.1 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 IT(TP)A.1031/Bang/2011 Page - 33 both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison.

13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration.

25. Vis-a-vis Megasoft Ltd, we find that coordinate bench of this Tribunal in the very case case of NXP Semi conductors India Ltd (supra) relying on its own earlier decision in Trilogy E-Business Software India Pvt.Ltd. Vs. DCIT [ITA No.1064/Bang/2011 for AY 07-08 order dated 23.11.2012] held it to be a good comparable, but had directed segmentation of its results. This Tribunal had directed that only the Blue Ally segment of the said company could be IT(TP)A.1031/Bang/2011 Page - 35 considered for comparison. Relevant findings of the Tribunal as it appears in the decision of NXP Semiconductors India Ltd (supra) is reproduced hereunder:

Megasoft Ltd. : 24. This company was chosen as a comparable by the TPO. The objection of the assessee is that there are two segments in this company viz., (i) software development segment, and (ii) software product segment. The Assessee is a pure software services provider and not a software product developer. According to the Assessee there is no break up of revenue between software products and software services business on a standalone basis of this comparable. The TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software. This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data.

25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining IT(TP)A.1031/Bang/2011 Page - 36

software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its software service segment. The product segment has employee cost of 27.65% whereas the software service segment has employee cost of 50%. Similarly, the profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both the segments are substantially different and therefore comparison at entity level is without basis and would vitiate the comparability (submissions on page 381 to 383 of the PB-I). It was further submitted that Megasoft Limited has provided segmental break-up between the software services segment and software product segment (page 68 of PB-II), which was also adopted by the TPO in his show cause notice (Page 84 of PB-I). The segmental results i.e., results pertaining to software services segment of this company was: Segmental Operating Revenues Rs.63,71,32,544 Segmental Operating Expenses Rs.51,75,13,211 Operating Profit Rs.11,96,19,333 OP/TC (PLI) 23.11%

26. It was reiterated that in the given circumstances only PLI of software service segment viz., 23.11% ought to have been selected for comparison.

27. It was further submitted that the learned TPO in case of other comparable, similarly placed, had adopted the margins of only the software service segment for comparability purposes. Consistent with such stand, it was submitted that the margins of the software segment only should be adopted in the case of Megasoft also, in contrast to the entity level margins. 28. Computation of the net margin for Mega Soft Ltd. Is therefore remitted to the file of the TPO to compute the correct margin by following the direction of the Tribunal in the case of Trilogy E- Business Software India Pvt.Ltd.”

23. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to compute the correct margin of Mega Soft Ltd., as directed by the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. (supra). Accordingly we hold that Megasoft Ltd can be considered as a good comparable after segmentation as directed in the above order is done.

IT(TP)A.1031/Bang/2011 Page - 37

“97.2 For a company to be included in the list of comparables, it is necessary that credible information is available about the company. Unless this basic requirement is fulfilled, the company cannot be taken as a comparable. It is true that ld. TPO is entitled to obtain information us/ 133(6), the object of which is primarily only to supplement the information already available on record, but not, as rightly submitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in 149 agreement with ld. counsel for the assessee that this company cannot be included as a comparable in the set of comparables selected by ld. TPO on account of clear contradiction between contents of annual report and information obtained u/s 133(6).

IT(TP)A.1031/Bang/2011 Page - 38

But how this segmentation was done by the TPO and the reconciliation of the said segmentation with the annual report of the assessee was never attempted or done. In such a situation we are of the opinion that Flextronics Software Solutions Ltd (seg) could not be considered as a proper comparable. We direct exclusion thereof.

7.1 This case was included by the assessee in its transfer pricing study. The TPO excluded this case because of different financial year ending in that case. The learned CIT(A) ordered for the inclusion IT(TP)A.1031/Bang/2011 Page - 39 of this case by recording that even though this company was following different financial year ending but the following different financial years could not be a reason to exclude this case.

7.2 The learned Departmental Representative contended that unless the financial year end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in the case of Sandstone Capital Advisors Private Limited v. ACJT in 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule IOB(4) and an another case of Pune Bench of the Tribunal in Honeywell Automation India Ltd., has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. The Id. DR contended that since the case of CMC Limited has a different financial year ending vis-a-vis that of the assessee, the same ought to have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by the Id. DR in this regard was not seriously challenged by the Id. AR. Respectfully following the precedent, we hold that this case should be excluded from the list of comparables.

IT(TP)A.1031/Bang/2011 Page - 40

IT(TP)A.1031/Bang/2011 Page - 41

However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon’ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables.

If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee’s own study, then the AO / TPO has to be given a chance for verification, in view of judgment of Hon’ble Pun jab & Haryana High Court in the case of Quark Systems India P. Ltd (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd back to the AO / TPO for consideration afresh as per law. Ordered accordingly.

the comparability of M/s. Accel Transmatics Ltd (seg), Quintegra Solution Ltd, Sasken Communication Technologies Ltd (seg) and Tata Elxsi Ltd (seg), considering the judicial precedence related to the comparability of these companies. We direct the AO / TPO to rework the average PLI of the comparables, as per the directions in the preceding paras and decide on the question of ALP adjustment accordingly.

IT(TP)A.1031/Bang/2011 Page - 43

34. On the arithmetic mean PLI of 30.21%, AO made a negative working capital adjustment of 1.60% and arrived at adjusted mean PLI of 28.61%. Shortfall in the value of the international transactions was worked out by the AO as under :

Operating Cost Rs.258,89,21,986/- Arm’s Length Margin 28.61% of the Operating Cost Arm’s Length Price (ALP) @ 128.61% Rs.332,96,12,566/- Price shown by the assessee Rs.279,24,76,527/- Shortfall being adjustment u/s.92CA Rs.53,71,36,039/- IT(TP)A.1031/Bang/2011 Page - 44

35. TPO recommended an adjustment of Rs.5,37,36,019/- in the ITES segment. When a proposal on the above lines was made assessee chose to move the DRP. However the DRP rejected its contentions and confirmed the recommendations of the TPO. Assessment was completed making an addition of Rs.52,71,36,039/- in the ITES segment.

i) First Advantage Offshore Services P. Ltd v. DCIT [IT(TP)A No.1086/Bang/2011, dt.30.04.2013]. ii) Stream International Services P. Ltd v. ACIT [ITA.8290/Mum/2011, dt.10.10.2014] Ld. AR submitted that in the case of First Advantage Offshore Services P. Ltd (supra), this Tribunal had clearly held that 25% employee cost filter had to be applied for ITES segment.

IT(TP)A.1031/Bang/2011 Page - 45

IT(TP)A.1031/Bang/2011 Page - 46

41. Per contra, Ld. DR supported the orders of lower authorities. According to him, grounds raised by assessee for exclusion of companies which it had not sought exclusion at lower levels, required a fresh consideration by the AO / TPO.

32. The group 2 consists of the companies which are to be excluded by applying the employee cost filter, these companies are - 1) Accentia Technologies Ltd. 2) Informed Technologies India 3) Vishal information Technologies Ltd.

33. According to the learned counsel for the assessee, these companies do not satisfy the employee cost filter of being more than 25%. He submitted that in the assessee's own case for the assessment year 2006-07, the Tribunal has held that the TPO cannot IT(TP)A.1031/Bang/2011 Page - 47

pick and choose ‘employee filter' for each sector when the same set of facts are available.

Above decision was also for A. Y. 2007-08. Thus there is doubt that employee cost filter necessarily has to be applied for ITES segment. However, what we find is that lower authorities had not applied this filter at all and also not worked out proportion of the employee cost with the total cost and total revenue. As per IT(TP)A.1031/Bang/2011 Page - 48 the assessee, if the employee cost filter of 25% is applied, Accentia Technologies Ltd, Asit C Mehta Financial Services Ltd, Informed Technologies India Ltd, Spanco Ltd (seg) and Vishal Information Technologies Ltd, would go out of the list of comparables. We are of the opinion that this requires a fresh look by the AO / TPO. We therefore set aside the issue of comparability of the above five companies in the ITES segment and remit it back to the AO / TPO for consideration of the employee cost filter after verifying the work out submitted by the assessee in this regard. Ordered accordingly.

43. As for Bodhtree Consulting Ltd (seg), Pune Bench of the Tribunal in the case of Affinity Express India P. Ltd (supra) had held as under at para 5 to 8 :

5. Before CIT(A) the assessee vehemently challenged the inclusion of M/s. Bodhtree Consulting Ltd., as a comparable. It was argued that the company is into the business of software development services and hence not functionally similar to that of the assessee. It was argued that as per the business description in its annual report for the year ended 31- 4 03-2007 not only its line of business is completely different but also its FAR is different than that of the assessee and consequently it is not a comparable company for benchmarking international transaction of the assessee. It was argued that M/s. Bodhtree Consulting Ltd. had hived of its e-paper business to its subsidiary company viz., Pressmart Media Ltd. for the year ended March 2007. Since the business of PML is in the field of e-paper which is in the industry of Information Technology Enabled Services (ITES), it would be appropriate to consider the subsidiary company as comparable in the assessee’s case which is also in ITES industry. However, the argument of the assessee that M/s. Bodhtree Consulting Ltd. is not functionally comparable was not accepted by the TPO and was retained as a comparable.

6. The assessee brought to the notice of the Ld.CIT(A) the following paragraph in the Director’s report in the annual report of the company:

IT(TP)A.1031/Bang/2011 Page - 49

Bodhtree has only one segment, namely software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies.

7. The assessee also drew the attention of the Ld.CIT(A) to the different parts of the annual report and information provided on the website of the company to contend that M/s. Bodhtree Consulting Ltd. is clearly into software development whereas the assessee company provides ITES, therefore, M/s. Bodhtree Consulting Ltd. cannot be considered as a comparable to the assessee.

8. Based on the arguments advanced by the assessee the Ld.CIT(A) directed the AO to exclude M/s. Bodhtree Consulting Ltd. from the list of comparables. While doing so, he observed that the various parts of the directors report as well as other references in the annual report make 5 it clear that M/s. Bodhtree Consulting Ltd. is into software development and therefore this company cannot be treated as comparable with the assessee company which renders ITES. Concerned assessment year being the very same, we are of the opinion that Bodhtree Consulting Ltd (seg) has to be excluded from the list of comparables.

25 Functions, Assets and Risks Analysis done by the taxpayer

25.1 Functions Currently. . the services offered by IIPGS through the Global Solutions Centre Bangalore ("GSCB") are voice and e-mail support. HPGS has entered into a General Services Agreement with IT(TP)A.1031/Bang/2011 Page - 50 its associated enterprises, for provision of technical call centre services through voice and email support. The functions performed by HPGS in relation to the provision of technical call centre services rendered by it are summarized below. Provision of services Based on the service requirements, the actual services are provided by HPGS through its contact centre in India, which is equipped with the necessary infrastructure and personnel. Associated enterprises provide training to HPGS for rendering the technical call centre services at the required quality levels. Technology transition and infrastructure set up Associated enterprises are responsible for establishing processes for identification and routing of email service requests or inquiries to HPGS. They are responsible for ensuring compatibility between HPGS's equipment and software and its hardware and databases. HPGS takes support calls on wintel-based portables, desktops, and servers that are redirected from HP's Customer Support Centres. HPGS establishes connectivity with HP's electronic support resources by installing International Private Leased Circuits with adequate bandwidth to support the requirement. HPGS has set up telecom infrastructure that is approved by HP and that has the capability of supporting the services and complying with HP's routing norms.

Quality check and review Associated enterprises monitor and review the technical call centre services provided by HPGS. They also have certain satisfaction level parameters on the basis of which they undertake quality checks and review the services provided for quality levels. HPGS assists associated enterprises in the quality check and review process. HPGS' Contact Center provides support services to HP's customers worldwide. This center provides remote management, mail-based support, chat-based support and voice-based support to a number of customers. It has an excellent soft-skills and technical training program, as well as world-class infrastructure facilitate and quality support services. During the financial year 2004-05, the HP decided to create a consolidated India based Global Delivery model for IT services. HPGS was made part of the HP Global Delivery organization IT(TP)A.1031/Bang/2011 Page - 51 pursuant to this decision. Consequently, HPGS now functions as a contract service provider to HP as opposed to an independent risk bearing entity. 25.2 Assets The taxpayer given the details of assets utilised for rendering technical call centre services as under in its TP report. 11.1. Assets utilized The net assets utilized by HPGS for provision of technical cal centre services as on Maich 31, 2007 are as follows Land Leasehold 3,246,431 Computer Equipment 90,793,667 Electrical Fittings 3,608,674 Furniture and Fixtures 18.927,861 Vehicles 21,704,134 Plant and Machinery 8,461.043 Office Equipment 44,079,779 Computer Software 2,336,578

25.3 Risks The taxpayer has given its risk profile as under in its TP report. "4.1.2 Risks assumed Service delivery risk In this case, if the services rendered by HPGS do not meet the expectations of the associated enterprises. IIPGS is not directly responsible. Associated enterprise bear the service delivery risk, as it enters into contracts with customers and are responsible jar any liability far defective services. Market Risk. The associated enterprises would be responsible for identifying and retaining clients and therefore the market risk would lie with them. Thus, HPGS assumes no market risk. Foreign exchange risk HPGS earns its revenues in USD whereas it incurs expenses in the INR. Associated enterprises make all payments to HPGS in IT(TP)A.1031/Bang/2011 Page - 52

USD which is its local currency. Any. adverse movement in the exchange rate would directly impact the profitability of HPGS. Thus the risk associated with adverse movements of exchange rates is borne In HPGS. Credit risk HPGS invoices associated enterprises far the performance of projects and services on a monthly basis and receives its payments within the credit period of 30 days. The risk of non payment by associated enterprises is mitigated Jar HPGS since they are related enterprises. Associated enterprises.face such risks since it deals with third parties. Capacity Utilization risk Provision of technical call centre services requires sizeable investment in infrastructure, in terms of premises, equipment, connectivity, personnel, etc. Generally, the risk of under utilization of capacity is to be borne by the entity making the investment i.e., HPGS. However, since HPGS is compensated on a cost plus basis Jar direct and indirect costs of operation including idle time cost, the capacity utilization risk is effectively borne by its associated enterprise. Government policy risk Since HPGS operates as a contract service provider to HP, any changes in the US Government policy regarding offshore service providers would affect both the entities. In this respect both HPGS and HP face sufficient risks.

The above risks are summarized in the table below: Service liability risk No Yes Market risk No Yes Foreign exchange risk Yes No Credit risk No Yes Capacity utilization risk No Yes Government policy risk Yes Yes

The risk profile of the taxpayer vis-a-vis other comparables has been dealt with in detail later in this order under the head "Risk Adjustment" and in the orders passed for the earlier assessment year(s).

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(xiv) Wipro Ltd (seg ) : The facts of this company are similar to the facts of Infosys BPO Ltd. Considered by us at Sl.No.(vi). For the similar reason, this company is also directed to be excluded from the final list of comparables.

What we find is that Coordinate Bench had followed its own directions in the case of Infosys BPO Ltd. In so far as comparability of Infosys BPO Ltd is IT(TP)A.1031/Bang/2011 Page - 54 concerned, we have in the preceding para remitted back to the AO / TPO for consideration afresh. Hence consistency requires that comparability of Wipro Ltd (seg) also go back to the AO / TPO, for consideration afresh in accordance with law. Ordered accordingly.

47. Vis-a-vis Maple Esolutions Ltd and Triton Corp Ltd, in the very same decision of Streamline International Services P. Ltd (supra), this Tribunal had held as under at para 13(i) and 13(ii) :

Maple Esolutions Ltd.:- The OP/TC of this company is 34.32%. It is (i) the say of the Id. Counsel for the assessee that this company was under serious indictment in fraud cases. A perusal of the order of the Tribunal for A.Y. 2006-07 in show that this company was excluded from the list of comparables. Respectfully following the precedent, we direct the exclusion of this company from the final list of comparables. Triton Corp. Ltd.:- The OP/TC of this company is 32.36%. It is (ii) the say of the Id. Counsel for the assessee that this company also deserves to be excluded as the Directors of this company were involved in fraud. therefore, financial results of the company are not reliable. In support.. reliance was placed on the decision of the Tribunal in the case Capital IQ Information Systems (India) Pvt. Ltd. in ITA No 1961/Hyd/2011, CRM Services India (P) Ltd. in ITA Ns 4068/(Del)/2009, Avincon India Pvt. Ltd. in ITA No. 1989/Mum/2011 and Market Tools Research Pvt. Ltd. on ITA No. 2066/Hyd/201l. We have perused the decisions relied upon by the Id. Counsel for assessee. We find that whenever a company or its directors are found to be involved in fraud, the co-ordinate Benches have taken a consistent view of excluding such company from the final list of comparables as the financial results are not reliable. Respectfully following this consistent view taken by the Tribunal, we direct the exclusion of this company from the final list of comparables.

IT(TP)A.1031/Bang/2011 Page - 55 Since the promoters and directors of these companies were involved in frauds there is much strength in the argument of the Ld. AR that their results were unreliable. However, we find that Maple E Solutions Ltd formed a part of assessee’s own TP study. Therefore while we direct exclusion of M/s. Triton Corp Ltd from the list of comparables, the question of exclusion of M/s. Maple E Solution Ltd is remitted back to the AO / TPO for consideration afresh in accordance with law. Ordered accordingly.

49. The very same bench in the case of ACIT v. Hapag Lloyd Global Services P. Ltd (supra) held as under : 7.2 The learned Departmental Representative contended that unless the financial year end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in the case of Sandstone Capital Advisors Private Limited v. ACIT in 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule 10B(4) and an another case of Pune Bench of the Tribunal in Honeywell Automation India Ltd., has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. The ld. DR contended that since the case of CMC Limited has a different financial year ending vis-a-vis that of the assessee, the same ought to have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by the ld. DR in this regard was not seriously challenged by the ld. AR. Respectfully following the precedent, we hold that this case should be excluded from the list of comparables.

In the case of Telelogic India P. Ltd v. DCIT [ITA No.166/Mum/2011, dt.18.05.2015, also a similar view was taken.

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50. In line with the above orders, we direct the exclusion of Calibre Point Business Solutions Ltd, HCL Comnet Systems & Services Ltd and R. Systems International Ltd, from the list of comparables in ITES segment.

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56. Grievance raised by the assessee in its ground 10 is that interest income earned by it was considered as income from other sources rejecting its contention that it was nothing but profits and gains from business or profession.

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Order pronounced in the open court on 23rd day of September, 2015.