SUN GARD SOLUTIONS (INDIA) PRIVATE LIMITED,BANGALORE vs. ACIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ B ” BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.(T.P) A. No.1487/Bang/2012 (Assessment Year : 2008-09) M/s. Sun Gard Solutions (India) Pvt. Ltd., Vs. Assistant Commissioner of 6th Floor, Embassy Icon, Income Tax, Infantry Road, Circle 12(3), Bangalore. Bangalore-560 001 PAN AAACE 7476K Appellant Respondent.

Appellant By : Shri K.R. Vasudevan, Advocate. Respondent By : Shri Farhat Hussain Qureshi, CIT (D.R) Date of Hearing : 25.05.2015. Date of Pronouncement : 30.7.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of assessment passed by the Asst. Commissioner of Income Tax, Circle 12(3), Bangalore passed under Section 143(3) rws 144C of the Income Tax Act, 1961 (in short 'the Act') vide order dt.7.9.2012 in pursuance of the directions issued by the Dispute Resolution Panel (‘DRP’) under Section 144C(5) rws 144C(8) of the Act vide order dt.26.6.2012. The relevant Assessment Year is 2008-09. 2. The facts of the case, briefly, are as under :- 2.1 The assessee company, a wholly owned subsidiary of Sun Gard Data Systems Inc. USA, is engaged in the business of provision of software development services to its Associated Enterprises (‘AE’). For Assessment Year 2008-09, the assessee filed its return of income declaring total income of Rs.1,00,10,120. The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In the year under consideration, the assessee had reported the following international transactions:-

2 IT(T.P) A No.1487/Bang/2012 (i) Provision of software services : Rs.37,61,50,003. (ii) Reimbursement of expenses (Received) : Rs2,26,20,160. (iii) Reimbursement of expenses (Paid) : Rs.36,39,030. 2.2 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer (‘TPO’) for determining the Arm’s Length Price (‘ALP’) of these international transactions, after obtaining the approval of the CIT– III, Bangalore. The TPO vide order passed under Section 92CA of the Act dt.31.10.2011 proposed a T.P. Adjustment of Rs.2,35,10,275 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment for Assessment Year 2008-09 under Section 143(3) rws 144C of the Act dt.12.12.2011 incorporating the above mentioned T.P. Adjustment of Rs.2,35,10,275 to the ALP of international transactions in respect of software development services rendered by the assessee as had been proposed by the TPO in her order under Section 92CA of the Act. 2.3 Aggrieved by the draft assessment order dt.12.12.2011 for Assessment Year 2008-09, the assessee filed its objections thereto before the DRP, Bangalore. The DRP vide its order passed under Section 144C(5) rws 144C(8) of the Act dt.26.6.2012 issued its directions confirming the additions/disallowances made by the TPO/A.O and rejected the objections raised by the assessee. In consequence thereof, the Assessing Officer passed the final order of assessment under Section 143(3) rws 144C of the Act dt.7.9.2012, against which the assessee is in appeal before the Tribunal. 3. Before proceeding to deal with the grounds of appeal raised by the assessee, the brief facts related to the T.P. issues are summarised hereunder :-

3 IT(T.P) A No.1487/Bang/2012 3.1 The assessee, a domestic private limited company is engaged in the provision of software development services to its Associated Enterprises (‘AEs’). For the year under consideration, the assessee had reported the following international transactions :-

S.No. International transactions Value (Rs.) 1. Provision of software development services 37,61,50,003 2. Reimbursement of Expenses (Received) 2,28,20,160 3. Reimbursement of Expenses (Paid) 36,37,030

The financial results reported by the assessee during the year under consideration are as under :- Operating revenue Rs.39,87,70,164 Expenditure (excluding Exchange loss) Rs.34,76,70,376 Profit Rs.5,10,99,788 PBIT / Expenditure 14.69% OBIT / Income 12.81% 3.2 The assessee conducted a T.P. Study in respect of its international transactions adopting TNMM as the Most Appropriate Method (‘MAM’). Based on the study conducted and the comparability analysis carried out, the assessee selected a set of 18 comparable companies as comparables to the assessee with the Mean Margin of 10.98%. As the margin of the assessee was 14.69%, the assessee concluded that the price of its international transactions were at Arm’s Length. 3.3 The TPO, while accepting TNMM as the MAM, rejected the assessee's T.P. Study for various reasons set out in the show cause notice issued to the assessee and embarked on a fresh search using the data bases ‘Prowess’ and ‘Capitaline’. After considering the objections of the assessee, the TPO selected the final set of 20 comparable companies, which are as under :-

4 IT(T.P) A No.1487/Bang/2012 Sl.No. Name of the company OP/TC % 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd. 29.81 5 Flextronics (Aricent) 7.86 6 iGate Global Solution Ltd. 13.99 7 Infosys 40.37 8 Kals Information Systems Ltd (Seg) 41.94 9 LGS Global Ltd. 27.52 10 Mindtree Ltd (seg) 16.41 11 Persistent Systems Ltd. 20.31 12 Quintegra Solution Ltd. 21.74 13 R Systems International (Seg) 15.30 14 R S Software (India) Ltd. 7.41 15 Sasken CommunicationTechnologies Ltd. (Seg) 7.58 16 Tata Elxsi (Seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd. 16.50 AVERAGE 23.65

3.4 The Average Mean Margin of the 20 comparable companies selected by the TPO was 23.65% whereas the margin of the assessee was 14.69% on total cost. After granting the assessee working capital adjustment of 2.19%, the TPO worked out the T.P. Adjustment at Rs.2,35,10,275 as under :-

5 IT(T.P) A No.1487/Bang/2012 Arm’s Length Mean Margin on cost 23.65% Less : Working Capital Adjustment (as per Annexure C) 2.19% Adjusted mean margin of the comparables 21.46% Operating Cost Rs.34,76,70,376 Arm’s Length Margin 121.46% of Operating Cost Arm’s Length Price (ALP) Rs.42,22,80,439 Price Received Rs.39,87,70,164 Shortfall being adjustment u/s. 92CA Rs.2,35,10,275

3.5 Based on the above computation, the TPO proposed an adjustment of Rs.2,35,10,275 which was incorporated by the Assessing Officer in the order of assessment. The order of assessment for Assessment Year 2008-09 was passed under Section 143(3) rws 144C of the Act vide order dt.7.9.2012 wherein the total income of the assessee was determined at Rs.3,52,93,346 in view of the following additions/disallowances :- (i) disallowance of deduction u/s.10A : Rs.17,63,449. (ii) Miscellaneous Income : Rs.9,502. (iii) T.P. Adjustment : Rs.2,35,10,275. 4.1 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.7.9.2012, the assessee has preferred this appeal arising the following grounds :- “ I. Transfer Pricing. 1. The ld. Assessing Officer and the ld. Asst. Commissioner of Income Tax (Transfer Pricing – VI), Bangalore grossly erred inlaw and facts of the case in determining the Arm’s Length Price of the international transactions of the appellant and thereby making an adjustment of Rs.23,510,275 with respect to the software development services rendered by the tax payer under Section 92CA of the Income Tax Act. 2. The ld. Assessing Officer and TPO ought to have accepted the arm’s length price as determined by the appellant. 3. The ld. TPO and the ld. A.O. ought to have accepted the difference in risk profile of the appellant vis-à-vis the comparable companies. The ld. TPO and the ld. A.O. erred in not allowing the benefit of market risk adjustment to the appellant. 4. The ld. TPO and the ld. A.O. erred in concluding that the appellant is exposed to single customer risk without evaluating the business arrangement of the appellant. 5. The ld. TPO and the ld. A.O. erred in not allowing the benefit of range of +/- 5% as provided in proviso to section 92C(2) of the Act to the appellant, while determining the arm’s length price. 6. On the facts and circumstances of the case, the ld. A.O. and ld. TPO erred in rejecting the T.P. documentation without appreciating the contentions, arguments, and evidentiary data put forward by the appellant during the course of the proceedings before them, and in doing so have grossly erred :

6 IT(T.P) A No.1487/Bang/2012 6.1 in rejecting the comparability analysis carried in the TP documentation and conducting a fresh comparability analysis for determining the arm’s length price by the ld. TPO. 6.2 In adopting the arm’s length mark up to be 23.65%, in respect of the international transaction pertaining to the rendering of software development services by the appellant; 6.3 in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Income- tax Act, 1961 ('the Act'), which in many instances are inconsistent with the data disclosed in audited reports. In doing so the learned TPO has erred in complying with the principles of natural justice. 6.4 in considering 25 percent as the threshold limit for the Related Party Transactions filter as this number is an arbitrary number that has been adopted without any judicial precedence or reasonable basis. 6.5 in rejecting the upper limit for sales turnover filter proposed by the appellant without providing any empirical analysis. In doing so, the learned TPO erred in not appreciating that the software industry is clearly demarcated based on SIze.

6.6 in accepting companies like Infosys Limited and Wipro Limited as comparable companies even though the sales of Infosys and Wipro are driven based on brand developed by them. In doing so the learned TPO and the learned AO have ignored the adjudication of the Delhi Income Tax Appellate Tribunal (IT AT) in Agnity India Technologies India Pvt. Ltd. (reference: IT A No. 3 856(Del)/20 10). 6.7 in accepting companies engaged in the prOVIsIOn of software product development like Avani Cimcon Technologies Limited, KALS Information Systems Limited, Persistent Systems Limited, Quintegra Solution Limited, Sasken Communication Technologies Limited, R Systems International Limited and Thirdware Solution Limited which are functionally not comparable to the Appellant's business. 6.8 in accepting Tata Elxsi Limited as a comparable company even though the company in its reply to the learned TPO under section 133(6) had mentioned that the company provides product design services, which is functionally not comparable to the Appellant's business. 6.9 in accepting companies such as Celestial Labs Limited, Flextronics Software Systems Limited and Softsol India Limited which are functionally not comparable to the Appellant's business;

7 IT(T.P) A No.1487/Bang/2012 6.10 in accepting companies like Celestial Labs Limited and Infosys Limited which have abnormal/fluctuating profit margins. In doing so the learned AO have disregarded the various jurisdictional IT AT rulings in case of SAP LABS India Pvt. Ltd. Vs. ACIT (reference ITA. No. 398IBang/2008), E-Gain Communication Private Limited (reference: ITA No. 1685/PN/07 - Pune); 6.11 in accepting companies like Flextronics Software Systems Limited, Quintegra Solutions Limited, Sasken Communications Technologies Limited, Wipro Limited and R Systems International Limited without taking into consideration the peculiar economic circumstances surrounding their operations during the year under review; 6.12 in accepting companies having Related Party Transactions exceeding 10% such as Softsol India Limited and Infosys limited. In doing so the learned AO has disregarded the Delhi IT AT ruling in case of Sony India Pvt. Ltd. (reference ITA No.1189/Del/2005); 6.13 in upholding the actions of the learned TPO in applying the export filter for selection of software comparables. In doing so, the learned TPO erred in rejecting Aarman Software Private Limited and VMF Soft Tech Limited. 6.14 in applying the onsite filter for selection of software comparables with the use of the data obtained under section 133(6) of the Act, is not economically valid. In doing so, the learned TPO erred in rejecting companies such as Akshay Software Technologies Limited, Prithvi Information Solutions Limited, Silverline Technologies Limited, Zylog Systems Limited and VJIL Consulting Limited.

6.15 in not maintaining consistency in applying the filters of rejecting companies with abnormal fluctuating margin, diminishing revenue/ persistent losses for the period under consideration, companies with peculiar economic circumstances, companies with different financial year ending, companies for which data are not available in database/ public domain and companies with related party transactions exceeding 25%. 6.16 in accepting companies like Wipro Limited, Thirdware Solution Limited, Persistent Systems Limited, Quintegra Solutions Limited Tata Elxsi Limited which owns intangible assets. 6.17 in accepting companies like Igate global solutions Limited, Thirdware solution Limited, E-Zest Solutions Limited and Wipro limited where segmental data pertaining to software development services is not available. 7. The learned TPO and the learned AO erred in disregarding the use of multiple year data, and ought to have accepted the use of contemporaneous data due to non-availability of current year data in the public domain at the time of preparing the documentation.

8 IT(T.P) A No.1487/Bang/2012 II. Computation of deduction under section lOA of the Act 1. Reduction of expenses incurred in foreign currency from the export turnover 1.1 The learned Assessing Officer ("learned AO") has erred in re-computing the deduction under section lOA of the Act as Rs. 5,80,71,963 instead of Rs. 5,98,35,412. 1.2 The learned AO has erred in reducing the following expenses incurred in foreign exchange from the export turnover alone.

Travel Expenses Rs. 53,68,970 Software expenses Rs.5,63,748 Employee Stock option plan Rs. 36,39,030 Internet charges- MPLS Rs.20,52,779 Others Rs.66,425 Total Rs. 1,16,90,952

1.3 The learned AO has erred in disregarding the submission made by the appellant that no part of the expenses incurred in foreign currency was incurred towards delivery of computer software outside India or for providing technical services outside India and hence, the same should not be reduced from the export turnover of the Company. 2. No corresponding reduction of expenses from the total turnover 2.1 Notwithstanding and without prejudice to the above, the learned AO has erred in reducing the aforesaid expenditure only from export turnover without reducing the same from total turnover in computing deduction under section lOA of the Act.

2.2 The learned AO has further erred in ignoring the settled principle, enunciated by the jurisdictional High Court in the case of Tata Elxsi Ltd. (ITA No. 70 of 2009), dated 30th August, 2011, that for the purpose of calculation of deduction under section lOA of the Act, any expenditure reduced from export turnover, should also be reduced from total turnover. 3. Denial of lOA deduction on the VAT refund of Rs. 9,502 3.1 The learned AO has erred in treating VAT refund amounting to Rs 9,502 as income from other sources.

9 IT(T.P) A No.1487/Bang/2012 3.2 The learned AO has erred in holding that VAT refund does not comprise income from business and profession and in denying lOA deduction on the same.

3.3 The learned AO has failed to give an opportunity to the assessee of being heard on the aforesaid issue. Ill. Erroneous double taxation of the VAT refund

4.2 The assessee vide letter dt.18.5.2015 has filed additional grounds of appeal at s.Nos.8 and 9 relating to T.P. issues; seeking exclusion of Lucid Software Ltd. and Bodhtree Consulting Ltd. from the list of comparables to the assessee. The assessee has filed detailed paper books in support of the grounds of appeal raised and also submitted copies of judicial decisions on which the assessee places reliance. TRANSFER PRICING ISSUES. 5.1 In the course of appellate proceedings, the learned Authorised Representative of the assessee submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO as comparable companies to the assessee. The learned Authorised Representative also submitted that he would make submissions only in respect of the comparability of the individual companies selected by the TPO in the final set of comparables.

10 IT(T.P) A No.1487/Bang/2012 5.2 The learned Authorised Representative further submitted that the facts of the case on hand, inter alia, are similar to that of the case of 3DPLM Software Solutions Ltd. In IT(TP)A No.1303/Bang/2012 dt.28.11.2013 of the co-ordinate bench of this Tribunal which was also for Assessment Year 2008-09, the year under consideration in the case on hand. It was submitted that the set of comparables chosen by the TPO in the cited case (supra) is exactly the same as those selected in the case on hand and therefore for the above reasons the assessee places reliance on the decisions rendered in the cited case. The learned Authorised Representative also submitted that in respect of the exclusion of M/s. Bodhtree Consulting Ltd., the assessee places reliance on the decision rendered by the co-ordinate bench in the case of NXP Semi Conductors India Pvt. Ltd. In IT(TP)A No.1560/Bang/2012 dt.5.3.2015 which is also rendered for Assessment Year 2008-09. 5.3 At the outset, it needs to be examined whether the facts of the cases in the judicial pronouncements relied on by the assessee are comparable and similar to the facts of the case on hand. We find that for the for exclusion of certain companies from the TPO’s list of comparables, the assessee has placed reliance on the decision of the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) and NXP Semi Conductors India Pvt. Ltd. (supra). As pointed out by the learned Authorised Representative in the aforesaid decisions relied on (supra); both cases are also in respect of Assessment Year 2008-09, which is the year under consideration in the case on hand and in both the cited cases also, the TPO has characterised the assessees in both the cited cases as captive service providers; providing software development services to their AEs. We also find that the 20 comparables chosen by the TPO are the same in both the cited cases as also in the case on hand. It is also seen that various parameters of comparability are also similar; in that the TPO has adopted TNMM as the MAM in these cases, the PLI has been adopted at Operating Profit to Total Cost (OP/TC). In these circumstances as laid out above, we agree with the contentions of the learned Authorised

11 IT(T.P) A No.1487/Bang/2012 Representative that the decisions rendered in the cited cases (supra) are applicable for considering the comparability of the companies in the assessee's case also. 5.4 In the light of the above observations, we now briefly examine the grounds of appeal raised by the assessee. As mentioned earlier, the learned Authorised Representative submitted that he would make submissions only on the comparability of the individual companies selected by the TPO in the final set of comparables. Therefore, only the grounds at S.Nos.6.6 to 6.11, 6.16 and 6.17 and the additional grounds at S.Nos.8 & 9 require adjudication. Therefore, since all the other grounds raised on Transfer Pricing issues i.e. at S.Nos.1 to 6.5, 6.12 to 6.15 and 7 are not pressed, they are rendered infructuous and accordingly dismissed. We now proceed to examine and consider each of the comparable companies that the assessee has sought exclusion of in the chart placed before us. 6. Avani Cincom Technologies Ltd. 6.1 This company was selected by the TPO as a comparable, inspite of the objections of the assessee that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO rejected the assessee's objections on the ground that this comparable company had categorised itself as a pure software developer, just like the assessee. In selecting this company as a comparable, the TPO had relied on information submitted by this company collected under Section 133(6) of the Act. 6.2 Before us, the learned Authorised Representative reiterated the assessee's objections to the inclusion of this company on the ground that this company is functionally different to the assessee as it is into software products. It is also submitted that 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

12 IT(T.P) A No.1487/Bang/2012 comparables, has not been shared by the assessee. The learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. In IT(TP)A No.1303/Bang/2012 dt.28.11.2013 for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables, inter alia, on the ground that this company is functionally dis-similar and different from the assessee which is a captive provider of software development services to its AEs. 6.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in selecting this company as a comparable to the assessee in the case on hand. 6.4.1 We have heard the rival contentions and have perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is functionally dis-similar and different from the assessee who is a provider of software development services to its AEs and directed that this company be omitted from the list of comparables. At paras 7.6.1 and 7.6.2 of its order, the co- ordinate bench held as under :- “ 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. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 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 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

13 IT(T.P) A No.1487/Bang/2012 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.” 6.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to exclude this company from the list of comparables. 7. Celestial Biolabs Ltd. 7.1 This comparable was selected as a comparable by the TPO overruling the objections of the assessee that this company is functionally different from the assessee and that it fails the employee cost filter. 7.2 Before us, the learned Authorised Representative of the assessee contended that this company is not functionally comparable to the assessee in the case on hand as it is into bio- informatics, software products and services and the segmental break up is not provided. The learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in its order in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, has held that this company be omitted from the list of comparables. 7.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparables to the assessee. 7.4.1 We have heard the rival submissions and perused and carefully considered the material on record, including the judicial decisions cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company, being into bio-informatics and software products and services, is to be omitted from the list of comparables as it was functionally dis-similar and different from a

14 IT(T.P) A No.1487/Bang/2012 captive software service provider. At paras 9.4.1 and 9.4.2 of the above order, the co-ordinate bench held as under :- “ 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO’s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the 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 from the list of comparables. The A.O./TPO are accordingly directed.” 7.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables. 8. e-Zest Solutions Ltd. 8.1 This company was selected as a comparable by the TPO after rejecting the assessee's objections that it was functionally different from the assessee. The TPO selected this company on the ground that as per the information furnished by this company under Section 133(6) of the Act, it is engaged in software development services and satisfies all the filters. 8.2 Before us, the learned Authorised Representative of the assessee reiterated the assessee's contention that this company be excluded from the list of comparables as it was

15 IT(T.P) A No.1487/Bang/2012 functionally different from the assessee. It was submitted by the learned Authorised Representative that this company is engaged in ‘e-Business Consulting Services’, which are high end ITES normally categorised as Knowledge Process Outsourcing (‘KPO’) services. It is also submitted that this company has not provided segmental data in its Annual Report. It was further submitted that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to providers of software development services and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be excluded from the list of comparables. 8.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables. 8.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has omitted this company from the list of comparables on the ground that the KPO services rendered by it are not comparable to those rendered by a captive provider of software development services. At para 14.4 of its order, the co-ordinate bench has held as under :- “ 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of 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 Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed.”

16 IT(T.P) A No.1487/Bang/2012 8.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer to exclude this company i.e. e-Zest Solutions Ltd., from the list of comparables. 9. Infosys Technologies Ltd. 9.1 This company was selected as a comparable by the TPO inspite of the objections of the assessee to its inclusion on grounds of size, turnover and brand attributable profit margin. The TPO was of the view that turnover and brand aspects were not materially relevant in the software development segment. 9.2 Before us, the learned Authorised Representative contended that this company is functionally different from the assessee in the case on hand as it commands substantial brand value, owns IPRs and intangibles of its own and is a market leader in software development activities, whereas the assessee is merely a captive software service provider catering to its AEs, does not possess its own IPRs or intangibles and has no brand value of its own. The learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company being functionally dis-similar and different cannot be comparable to a captive software service provider, and therefore omitted it from the list of comparables. 9.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables to the assessee. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 and held that this company i.e. Infosys Technologies Ltd. is functionally dis-similar and different from a captive software service provider and therefore directed that this company be excluded from the list of comparable. At para 11.4 of its order, the co-ordinate bench has held as under :-

17 IT(T.P) A No.1487/Bang/2012 “ 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.” 9.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer / TPO to exclude this company from its list of comparables. 10. KALS Information Systems Ltd. 10.1 This company was selected as a comparable by the TPO inspite of the assessee's objections to its inclusion on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to revenues from software services and software products. 10.2 Before us, the learned Authorised Representative of the assessee contended that this company ought to be rejected from the list of comparables since it is functionally different; being into software products, whereas the assessee in the case on hand was a captive software service provider to its AEs. The learned Authorised Representative submitted that the co- ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company being into software products is functionally dis-similar and different from captive software service providers and directed that it be excluded from the list of comparables. 10.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables to the assessee.

18 IT(T.P) A No.1487/Bang/2012 10.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008- 09 has held that this company i.e. KALS Information Systems Ltd. being into software products is functionally different from a captive software service provider, as is the assessee in the case on hand. At para 10.4 of its order, the co-ordinate bench has held as under :- “ 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company’s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly.”

10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer / TPO to exclude this company form the list of comparables. 11. Persistent Systems Ltd. 11.1 This company was selected as a comparable by the TPO inspite of the objections of the assessee to its inclusion on the grounds that being into software product design and analytic services, it is functionally different from the assessee in the case on hand who is a captive software service provider to its AEs. It was also pointed out that segmental data of this company was not available. The TPO rejected the assessee's objections and included this

19 IT(T.P) A No.1487/Bang/2012 company as a comparable on the ground that it is mainly a software development company and as per details furnished in response to information called for under Section 133(6) of the Act, software development constitutes 96% of its revenues. 11.2 Before us, the assessee objected to the inclusion of this company in the list of comparables for the reason that it is functionally different from a captive software service provider like the assessee in the case on hand, as it is engaged in software designing services, product designing services and analytic services. It was also pointed out by the learned Authorised Representative that page 60 of its Annual Report for F.Y. 2007-08 indicates that this company is predominantly engaged in ‘Outsourced Software Product Development Services’ for independent software vendors and enterprises. The learned Authorised Representative prays that in view of the above it is clearly establish that this company i.e. Persistent Systems Ltd. is functionally dis-similar and different from a captive software service provider like the assessee and therefore requires to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative placed reliance on the decision of the co- ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 wherein this company was omitted from the list of comparables to software development services providers on being found to be functionally different. 11.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 11.4.1 We have heard the rival submissions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company is to be excluded from the list of comparables to a captive software service provider, as is the assessee in the case on hand, since it is functionally different; being into product development

20 IT(T.P) A No.1487/Bang/2012 product design services and product analysis services. At para 17.3 of this order, the co- ordinate bench has held as under :- “ 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.”

11.4.2 Following the above decision of the co-ordinate bench of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables to the assessee in the case on hand. 12. Quintegra Solutions Limited. 12.1 This company was selected as a comparable by the TPO inspite of the assessee's objections that this company is functionally different and also since 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. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee had not adduced any evidence to show that this event had any influence on the pricing or the margin earned. 12.2 Before us, the assessee objected to the inclusion of this company in the list of comparables on the ground that it was functionally different and also that there were other factors for which this company cannot be considered as a comparable to the assessee in the case on hand who was a captive software service provider to its AEs. It is submitted that this company i.e.Quintegra Solutions Ltd. is engaged in product engineering services and its Annual Report states that it is engaged in proprietary software products and in research and

21 IT(T.P) A No.1487/Bang/2012 development activities which has resulted in creation of its own IPRs. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 where this company was excluded from the list of comparables on the ground of functional differences from a captive software service provider. 12.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company as a comparable to the assessee. 12.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has omitted this company i.e. Quintegra Solutions Ltd. from the list of comparables since it is into product engineering services; is engaged in proprietary software products, has substantial R&D activity which has resulted in creation of IPRs and its own intangible assets thereby making it functionally different from the assessee in the case on hand is a captive software service provider; as is the assessee in the case on hand. At paras18.3.1 to 18.3.3 of its order, the co-ordinate bench has held as under :- “ 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. 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 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 from 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

22 IT(T.P) A No.1487/Bang/2012 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.” 12.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the Assessing Officer/TPO to omit this company from the list of comparables. 13. Tata Elxsi Ltd. (Seg.) 13.1 This company was selected as a comparable by the TPO overruling the objections of the assessee to the inclusion of this company on several counts like functional dis-similarity, having significant R&D activity, brand value, size, etc. 13.2 Before us, the learned Authorised Representative contended that this company i.e.Tata Elxsi Ltd., is not functionally comparable to the assessee as it performs a variety of functions under software development services segment, namely product design, innovation design engineering, visual computing labs etc. as per the details reflected in its Annual Report; whereas the assessee in the case on hand is a captive software service provider. In support of its plea for excluding this company from the limit of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein this company was omitted from the list of comparables on grounds of being functionally different and dis-similar to a captive software service provider. 13.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited by the assessee. We find that the co- ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the set of

23 IT(T.P) A No.1487/Bang/2012 comparables as it is functionally different and dis-similar from a captive software service provider, as is the assessee in the case on hand. At paras 13.4.1 and 13.4.2 of its order, the co-ordinate bench has held as under :- “ 13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- “ …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable portion.” As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.” 13.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the Assessing Officer / TPO to exclude this company from the list of comparables to the assessee. 14. Thirdware Solutions Ltd. 14.1 This company was selected as a comparable by the TPO inspite of the assessee's objections to its inclusion 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 on the ground that apart from software development services, it is in the business of product development; trading in software and giving licenses for the use of software. The learned Authorised

24 IT(T.P) A No.1487/Bang/2012 Representative also pointed out from the Annual Report that this company has not provided any separate segmental profit and loss account for software development services and product development services. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co- ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein it was held to be not comparable to a purely software development service provider. 14.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decision relied on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has directed exclusion of this company from the list of comparables to a pure software service provider, like the assessee in the case on hand, as it is functionally different; being engaged in product development and earns revenue from sale of licenses and subscription, etc. holding as under at para 15.3 of its order :- “ 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.”

25 IT(T.P) A No.1487/Bang/2012 14.3.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 15. Wipro Limited (Seg.) 15.1 This company was selected as a comparable by the TPO inspite of the objections by the assessee to its inclusion in the list of comparables on several grounds like functional dis- similarity, brand value, size, turnover etc. 15.2 Before us, the learned Authorised Representative of the assessee contended that this company namely, Wipro Ltd., is not functionally comparable to the assessee as it owns significant intangibles in the nature of customer related intangibles and technology related intangibles; has huge brand value, is a market leader in size and turnover which render it not functionally comparable to a captive provider of software development services. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein this company was held to be functionally different and dis-similar and not comparable to a captive provider of software development services. 15.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 15.4.1 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 case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be excluded from the list of comparables as it is functionally different and dis-similar from a captive software development service provider, as is in the case on hand. At para 12.4.1 and 12.4.2 of its order the co-ordinate bench in its order (supra) has held as under :- “ 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

26 IT(T.P) A No.1487/Bang/2012 of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration.” 15.4.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer / TPO to omit this company from the list of comparables. 16. Softsol India Ltd. 16.1 This company was selected as a comparable by the TPO inspite of the objections of the assessee to its being taken as 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 in the company’s reply to information called for under Section 133(6) of the Act it had categorised itself as a pure software developer and included this company as a comparable as the assessee was also a provider of software development services. Before us, the learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company was to be excluded from the list of comparables as its Related Party Transaction

27 IT(T.P) A No.1487/Bang/2012 (‘RPT’) is in excess of 15%, by following the decision of another co-ordinate bench in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2011. It was prayed that in view of the above, this company be excluded from the list of comparables. 16.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 16.3.1 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 case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company, since it has RPT in excess of 15% in the period under consideration is to be omitted from the list of comparables holding as under at para 19.3 thereof :- “ 19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in 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 Pvt. Ltd. in ITA No.227/Bang/2011. As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the co-ordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand.” 16.3.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer / TPO to omit this company from the list of comparables. 17. The assessee preferred additional grounds of appeal at S.Nos.8 & 9 seeking the exclusion of the following two companies from the list of comparables :- i) Lucid Software Ltd. ii) Bodhtree Consulting Ltd. After hearing the rival submissions of both the learned Authorised Representative and learned Departmental Representative on the issue of admission of additional grounds of appeal

28 IT(T.P) A No.1487/Bang/2012 filed by the assessee; we, in the interest of equity and justice, admit the additional grounds for consideration and the same are disposed off as hereunder. 18. Lucid Software Ltd. 18.1 This company was selected as a comparable by the TPO and its inclusion was not objected to by the assessee. Before us, the assessee has sought the exclusion of this company from the list of comparables on the ground that this company, i.e. Lucid Software Ltd., is into software product development and therefore is functionally different from the assessee who is a captive software development service provider to its AEs. The learned Authorised Representative submitted that for exclusion of this company from the list of comparables reliance is placed on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the list of comparables on the ground that it is engaged in software product development and therefore was held to functionally different and dis-similar from providers of software development services. 18.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 18.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company is to be excluded from the list of comparables as this company i.e. Lucid Software Ltd., being engaged in development of software products, was functionally different from a provider of software development services, as is the assessee in the case on hand. At para 10.3 of its order the co-ordinate bench has held as under :- “ 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

29 IT(T.P) A No.1487/Bang/2012 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 Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.” 18.3.2 Following the above decision of the co-ordinate bench of the Tribunal (supra), we direct the Assessing Officer / TPO to exclude this company form the list of comparables. 19. Bodhtree Consulting Ltd. 19.1 This company was selected as a comparable by the TPO and the assessee did not object to the same before the TPO. Before us, the contention of the assessee is that this company is engaged in product development, ITES and other value added services, apart from provision of software development services and that the revenue generated by the company is not only from software development services. Also, no segmental data has been provided by the company in the Annual Report. It was further submitted that there is an abnormal fluctuation in the operating revenue vis-à-vis operating cost on a year to year basis and also wide fluctuation in the year-on-year percentage change in operating revenue vis-à-vis employee cost, which indicates that this company is facing higher risk, which is an contrast to the assessee which is a captive software service provider. It was also submitted that the co- ordinate bench of this Tribunal in the case of NXP Semi Conductors (P) Ltd., in IT(TP)A No.1560/Bang/2012 dt.5.3.2015 for Assessment Year 2008-09 has held that this company is not

30 IT(T.P) A No.1487/Bang/2012 comparable to companies engaged in software development services and prayed that in view of the above, this company be excluded from the list of comparables to the assessee. 19.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables. 19.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in the case of NXP Semi Conductors (P) Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparable companies to those engaged in provision of software development services, like the assessee in the case on hand, since Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open and end-to-end web solutions, software consultancy and design and development of software using latest technology. At paras 15.3.1 and 15.3.2 of the above order, the co-ordinate bench has held as under :- “ 15.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited by the ld. A.R. We find that this company has been excluded from the set of comparables for software development service companies in both the aforesaid decisions cited by the assessee. In Mindtech (India) Ltd., the relevant portion of the order at para 16 thereof it has been held as under :- “ 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly.”

31 IT(T.P) A No.1487/Bang/2012 The relevant portion of the order in the case of CISCO Systems (India) Pvt. Ltd. (supra) at para 26.1 is extracted hereunder :- “ 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee’s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company.” 15.3.2 It is also seen that the decision relied on by the co-ordinate bench of this Tribunal in the above mentioned case; CISCO Systems (India) Pvt. Ltd. (supra), has been in relation to Assessment Year 2008-09 and therefore we find merit in the contention of the assessee that the finding rendered in the above cited decision applies to the facts and circumstances of the case on hand, which is for Assessment Year 2008- 09. In this view of the matter, following the above decision of the co-ordinate bench of the Tribunal, we direct the TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly.” 19.3.2 Following the above decision of the co-ordinate bench, we direct the Assessing Officer/TPO to exclude this company i.e. Bodhtree Consulting Ltd. form the list of comparables. II. Deduction under Section 10A of the Act.

32 IT(T.P) A No.1487/Bang/2012 Ground No.2 is on the issue of reducing expenses incurred in foreign currency from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act. In proceedings before us, the learned Authorised Representative submitted that the assessee would be pressing only Ground No.2 (supra) and Ground No.1 is not pressed. 20.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (2012) 349 ITR 98 (Kar), we are of the view that it would be just and appropriate to direct the Assessing Officer that travel, interest charges – MPLS, etc incurred in foreign currency are to be excluded from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act, as has been prayed by the assessee in its alternate plea at Ground raised at No.2. In view of the acceptance of the alternate plea of the assessee, and also since the Ground No.1 is not pressed in this appeal, it is rendered infructuous and is accordingly dismissed. 20.3.1 In Ground No.3, under the computation of deduction under Section 10A of the Act, the assessee contends that the Assessing Officer has erred in treating VAT refund as ‘income from other sources’ while computing the deduction under Section 10A of the Act. It is the contention of the assessee that VAT Refund does not constitute ‘income from other sources’ and has to be treated as ‘income from business’. It is also contended that the assessee was not afforded opportunity of being heard on this issue. 20.3.2 On an appreciation of the material on record, we find that the DRP had confirmed the Assessing Officer’s finding on the ground that the assessee failed to adduce any evidence to

33 IT(T.P) A No.1487/Bang/2012 support its claim. Considering the submissions made that the assessee was not afforded any opportunity of being heard in the matter and that the DRP dismissed its claim for lack of evidence being adduced, we deem it fit to remand the matter to the file of the Assessing Officer for de novo consideration of this issue and to decide thereon after affording the assessee adequate opportunity of being heard and to file details/evidence to support its claim in the matter. III. Double Deduction of VAT Refund. 21. In this ground, the assessee contends that the Assessing Officer has included VAT refund twice in the computation of income, resulting in double taxation of VAT refund. It is also submitted that a rectification application on this issue is pending before the Assessing Officer. In the above factual situation of the matter, we direct the Assessing Officer to examine the issue and decide the matter on merits, after granting the assessee reasonable opportunity of being heard and submit evidence to support its claim, before deciding the matter. IV. Interest under Section 234B of the Act. 22. In this ground, the assessee denied itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B and 234C of the Act, if any, while giving effect to this order. 23. In the result, the assessee's appeal for Assessment Year 2008-09 is partly allowed. Order pronounced in the open court on 2015.

Sd/- SD/- (N.V.VASUDEVAN) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp