DCIT, BANGALORE vs. M/S MISYS SOFTWARE (I) PVT. LTD.,, BANGALORE

Assessee By : Shri Arvind Sonde, C.A. Revenue By : Shri Farhat Hussain Qureshi, CIT (D.R) Date of Hearing : 22.10.2014 Date of Pronouncement : 9.1.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by revenue is directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.12.9.2011 for Assessment Year 2005-06. The assessee has also filed cross objections in the matter. 2. The facts of the case, briefly, are as under :-

2 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 2.1 The assessee, a resident company is a wholly owned subsidiary of Misys International S.A., Luxembourg and is part of the Misys PLC, U.K. The assessee is engaged in the provision of software development and product support services to its group companies. For Assessment Year 2005-06, the assessee filed the return of income on 30.10.2005 declaring income of Rs.29,830 after claiming deduction under section 10A of the Income Tax Act, 1961 (in short 'the Act'). The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The Assessing Officer made a reference to the Transfer Pricing Officer (‘TPO’) under section 92CA(1) of the Act in respect of the following international transactions entered into by the assessee with its Associated Enterprises (AEs) in the year under consideration; as reported in the 3CEB report filed by the assessee :- (i) Contract Software Development Services: Rs.51,73,68,601. (ii) Reimbursement of Expenses paid / payable: Rs.25,91,064. (iii) Reimbursement of expenses received / receivable:Rs.2,04,13,805. The TPO passed an order under section 92CA of the Act dt.2.4.2008 in respect of the aforesaid international transactions entered into by the assessee with its AEs (supra), making an adjustment of Rs.6,45,40,063 to the arms length price (ALP) of international transactions of the assessee in respect of its software development services. 2.2 After receipt of the order of the TPO under section 92CA of the Act dt.2.4.2008, the Assessing Officer completed the assessment under section 143(3) of the Act vide order dt.27.11.2008 determining the income of the assessee at Rs.6,790,33,737 as against the returned income of Rs.29,830 in view of the following additions / disallowances thereto :-

3 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 (i) Disallowance on account of recomputation of deduction u/s.10A : Rs.33,63,844. (ii) Transfer Pricing adjustment : Rs.6,45,40,063.

IT(TP)A No.1110/Bang/2011 – Revenue’s appeal for Assessment Year 2005-06. “

1. The order of the learned CIT (Appeals) is opposed to law and facts of the case.

2. The CIT (Appeals) erred in holding that expenditure of Rs.2,12,28,101 towards daily allowance, Rs.24,28,829 towards support allowance and Rs.30,75,083 incurred towards miscellaneous travel expenses, all incurred in foreign currency are to be excluded from total turnover as well for the purpose of computation of deduction under section 10A of the I.T. Act, 1961 while such exclusion is permitted to arrive at the export turnover only as per the definitions given in section 10A of the Act and total turnover has not been defined in the section.

3. In the facts and circumstances of the case, the learned CIT (Appeals) erred in holding that the TPO erred in not excluding comparables having any related party transactions, even if the related party transactions are less than 25% of the revenues.

4. The learned CIT (Appeals) erred in holding that profit on cost of more than 50% of the comparable companies is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from the appellant company.

5. The learned CIT (Appeals) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm’s Length Price under the proviso to section 92C(2) of the Income Tax Act.

6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.

7. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.”

4 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 C.O. No.20/Bang/2012 – Assessee's C.O. for A.Y. 2005-06.

3. That in making an adjustment to the Respondent’s transfer price, on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in : a) Upholding the comparability analysis performed by the learned TPO in the TP Order. b) Modifying some of the filters applied by the learned TPO in the TP Order, without providing an opportunity of being heard to the appellant. c) Arbitrarily arriving at a set of companies as comparable to the Respondent. d) Disregarding application of multiple year / prior year data and holding that current year (i.e. Financial Year 2005-06) data for companies should be used for comparability. e) Upholding the learned TPO’s approach of using data as at the time of assessment proceedings. f) Upholding the approach adopted by the learned TPO of collecting selective information of the companies by exercising power granted to him under section 133(6) of the Income Tax Act, 1961 that was not available to the Respondent in the public domain. g) Not providing appropriate adjustment towards the risk differential between the Respondent and the entrepreneurial companies selected as comparables, while determining the arm’s length price.

4. That the learned CIT (Appeals) erred in upholding the inclusion of reimbursement expenses as part of the operating cost and income in determining the arm’s length price by the learned TPO.

5. That consequently the learned Assessing Officer erred in levying interest under section 234B of the Act, while giving effect to the order of the CIT (Appeals).”

5 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 Transfer Pricing Issues. 6.0 Before proceeding to deal with the above grounds of appeal on T.P. issues, the approach of the TPO vis-a-vis that of the assessee in its T.P.Study submitted before the TPO is briefly summarised as under. 7.1 The assessee is engaged in the provisions of software development and support services to its group companies. For the year under consideration, the assessee has reported the following international transactions in its 3CEB report :- (i) Software Development Services : Rs.51,73,68,601 (ii) Reimbursement of expenses paid / payable : Rs.25,91,064. (iii) Reimbursement of expenses paid / receivable : Rs.2,04,13,805. The assessee conducted its T.P. Study apply the Transactional Net Margin Method (TNMM) as the most appropriate method (MAM) and adopted “Operating Profit” to “Operating Cost “ as the profit level indicator (PLI). After conducting a search using ‘Prowess’ and ‘Capitaline’, the assessee identified the following 24 companies as comparables :- Sl.No. Name of the comparable company.

1. Advanced Micronic Devices Ltd. (Seg.) 2. Akshay Software Technologies Ltd. 3. Aviation Software Dev. Consultancy Ltd. 4. Aztecsoft Ltd. 5. Bodhtree Consulting Ltd. 6. Capricon Systems Global Solutions Ltd. 7. E.Star Infotech Ltd. 8. Gebbs Infotech Ltd. 9. Goldstone Technologies Ltd. 10. L&T Infotech Ltd. 11. Melstar Information Technologies Ltd. 12. Netvista Information Technology Ltd.

6 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 13. NIIT Ltd. (Seg.) 14. ORG Informatics Ltd. (Seg.) 15. Orient Information Technologies Ltd. 16. Rico Softech LTd. (Seg.) 17. Satyam Computer Services Ltd. 18. Seymour Technologies Ltd. 19. Sonata Software Ltd. 20. SQL Star International Ltd. (Seg.) 21. SSI Ltd. (Seg.) 22. Transworld Infotech Ltd. 23. Visesh Infotechnics Ltd. (Seg.) 24. VJIL Consulting Ltd.

7.2 As the average profit margin of the assessee worked out at 12.5% was higher than the arithmetical mean margin of the comparables worked out @ 11% on cost, the assessee held that its international transactions were at arm’s length.

S.No. Name of the comparable company OP/OC (%) 1. Bodhtree Consulting Ltd. 24.85 2. Lanco Global Systems Ltd. 13.65 3. Exensys Software Solutions Ltd. 70.67 4. Sankhya Infotech Ltd. 27.38 5. Sasken Network Systems Ltd. 16.63 6. Four Soft Ltd. 22.98 7. Thirdware Solution Ltd. 66.09 8. R.S. Software (India) Ltd. 8.07

7 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 9. Geometric Software Solutions Co. Ltd. 20.33 10. Tata Elxsi Ltd. (Software Devt. 24.343 Services - Seg) 11. Visual Soft Technologies Ltd. (Seg) 23.51 12. Sasken Communication Technologies 14.41 Ltd. (Seg) 13. iGate Global Solutions Ltd. (Seg) 4.32 14. Flextronics (Seg) 32.19 15. L&T Infotech Ltd. 10.33 16. Satyam Computers Services 29.44 17. Infosys Ltd. 42.83 8.2 The arithmetic mean of these 17 comparables was computed at 26.59%. After allowing working capital adjustment of 2.42%, the adjusted arithmetic mean of these comparables was adopted at 24.17%. The resultant shortfall in the price amounting to Rs.6,45,40,063 was taken at the T.P. adjustment to the ALP of the international transactions of the assessee with its AEs and added to the income of the assessee. 9.1 In the impugned order, the learned CIT(A) after considering the submissions of the assessee disposed off the assessee's appeal excluding 13 out of the 17 companies chosen by the TPO as comparables to the assessee. After considering the arithmetic mean of the profit margins of the remaining four companies in the list of comparables chosen by the TPO, the learned CIT(A) recomputed the TP Adjustment and upheld the TP Adjustment to the extent of Rs.89,56,666. While deciding on the exclusion of the 13 companies from the 17 comparable companies chosen by the TPO, the learned CIT(A) adjudicated on the following issues as under.

8 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 9.2 Companies with Related Party Transactions (‘RPF’) The learned CIT(A) relying on the decision of the co-ordinate bench of this Tribunal in the case of Phillips Software Centre Pvt. Ltd. V ACIT (26 SOT 226), held that companies with any RPT are to be excluded from the set of comparable companies and accordingly 12 of the 17 companies selected by the TPO were excluded from the set of comparable companies. As seen from the order of the learned CIT(A) in case of some of the comparable companies, the assessee had argued against their inclusion on grounds of there being functionally dis- similarity also. We find that the learned CIT(A) has not adjudicated on this aspect, as the companies had been excluded from the list of comparables on the ground of RPT. 9.3 Companies with abnormal profits Relying on the various decisions cited in the impugned order, the learned CIT(A) held that profit on cost of more than 50% is abnormal and companies showing 50% or more profit percentage on cost have to be excluded from the list of comparables. Accordingly, 2 out of the 17 companies selected by the TPO were excluded from the set of comparable companies. 9.4 Computation of Deduction u/s.10A of the Act. In respect of the assessee's claim for deduction u/s.10A of the Act, the learned CIT(A) relying on the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (349 ITR 98) and of the Special Bench of the Chennai ITAT in the case of Sak Soft Ltd. (313 ITR 353), directed the Assessing Officer to recompute the same by reducing from the “total turnover”, the same amount by which the “export turnover” has been reduced.

9 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 10.1 In the proceedings before us, the learned Departmental Representative challenged the impugned order of the learned CIT(A) on the issue of RPT and abnormal profit, placing reliance on later decisions of the co-ordinate benches of this Tribunal in support of the stand of revenue. On the contrary, the learned Authorised Representative of the assessee assailed the impugned order of the learned CIT(A) in confirming part of the TP Adjustment and submitted paper books vide letters dt.28.1.2013 and 29.10.2014. The learned Authorised Representative also filed a chart in which it has been submitted that the following companies ought to be excluded from the set of comparable companies, for the reasons given therein :- S.No. Name of the company Reasons given by assessee for exclusion.

8. Geometric Software Solutions Ltd. Software product company.

10.2 We have heard both parties, perused and carefully considered the order of the TPO under section 92CA of the Act, the order of assessment, the impugned order of the learned CIT(A), the submissions of both the learned Departmental Representative for revenue and the 10 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 learned Authorised Representative of the assessee, including the judicial decisions cited and placed reliance upon. We now proceed to consider the various issues raised by Revenue and the assessee. Revenue’s appeal in IT(TP)A No.1110/Bang/2011 for A.Y. 2005-06. 11. The Grounds raised by Revenue at S.Nos.1, 6 & 7 are general in nature and no adjudication being called for thereon, are dismissed as infructuous.

12. Ground No.2 : Computation of Deduction u/s.10A of the Act. 12.1 Revenue challenges the order of the learned CIT(A) in directing the Assessing Officer to recompute the eligible deduction to the assessee u/s.10A of the Act by reducing the expenditure incurred in foreign currency amounting to Rs.2,12,28,101 towards daily allowance, and Rs.24,28,828 towards support allowance and Rs.30,75,083 towards miscellaneous expenditure, from both ‘export turnover’ as well as ‘total turnover’. The learned Departmental Representative was heard in support of the ground raised. 12.2 Per contra, the learned Authorised Representative supported the impugned order of the learned CIT(A) on this issue, submitting that the issue is now covered in favour of the assessee by the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra). The learned A.R. contends in view of this, Revenue’s appeal on this Ground is liable to be dismissed. 12.3 We have heard the rival submissions and perused and carefully considered the material on record. We find, as submitted by the learned Authorised Representative, that the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra) has held that while computing the 11 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 deduction under section 10A of the Act, if the export turnover in the numerator is to be arrived at after excluding certain expenditure, then the same expenditure should also be excluded from the total turnover also. Respectfully following the same, we dismiss this ground of revenue and direct the Assessing Officer to exclude the expenditure incurred in foreign currency towards daily allowance, support allowance and travel both from export turnover as well as from total turnover for computing deduction under section 10A of the Act. Accordingly, Ground No.2 raised by revenue is dismissed.

12 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 “ 13.0 RELATED PARTY TRANSACTIONS In respect of the ground raised at S.No.1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO’s setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - “ ………..We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the impact of the related party transactions vis-à-vis sales and not profit since profit of an enterprise is influenced by large number of other factors ….” Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Officer / TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial year 2003-04.” 13.2.2 In the light of the above decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we find that the decision of the learned CIT (Appeals) in excluding those companies with any RPT is not in keeping with the above decision of the co- ordinate bench of this Tribunal. Respectfully following the above decision, we hold that the learned CIT (Appeals) was not correct in holding that companies with any RPT have to be excluded from the set of comparable companies, and direct the TPO / A.O. to apply the RPT filter at 15% of total revenues for including / excluding the comparable companies, excluded by the learned CIT (Appeals), in the final set of comparables. Consequently Ground No.3 raised by revenue is partly allowed.

13 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 14. Ground No.4 : Companies with Abnormal Profits.

14.1 In Ground No.4, revenue assails the decision of the learned CIT (Appeals) in the impugned order in excluding companies with profit margin of more than 50% from the final set of comparable companies by holding the profit margin in excess of 50% to be abnormal.

14.2.1 We have heard the rival contentions of both the learned Departmental Representative for revenue and the learned Authorised Representative of the assessee. This is an issue on which there have been conflicting decisions of various Tribunals. However, the Special Bench of the ITAT, Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd., in has held that companies cannot be excluded from the set of comparables only because the margins are high and the matter in such cases would require further investigation to ascertain the reasons for unusually high profits in order to establish whether the entities with such high profits can be taken as comparables or not. The operative portion of this order at paras 97 to 99 thereof are extracted hereunder :- “ 97. At the time of hearing before us, both the sides have cited several decisions of the Tribunal in support of their corresponding stand taken on this issue. After going through all these decisions of the Division Benches of this Tribunal, we find that the issue relating to exclusion of high profit margin entities from comparables has been decided in favour of the assessee in the cases cited by Shri Porus Kaka without taking into consideration some vital aspects including the relevant TP Regulations in India. It is observed that the decision initially taken in one case without much meaningful discussion has been invariably followed by the Tribunal in other cases decided thereafter. On the other hand, it is observed that the Tribunal, in some of the cases cited by Shri Ajeet Kumar Jain, the ld. CIT DR, has passed well discussed and well reasoned orders after taking into consideration not only the relevant TP 14 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 regulations in India but even the relevant OECD guidelines. For instance, in the case of BP India Services Private Limited (supra), it was held by the Mumbai Bench that the very rationale of having average in case of more than one comparables is to iron out the effect of extreme cases and find the profit margin as a representative of the whole lot. It was also held by the Tribunal that the higher or lower profit rate has not been prescribed as the determinative factor in the relevant Rules i.e. Rule 10B(2) and 10B(3) to make a case incomparable. The Tribunal observed that the profit rate in any case cannot be such determinative factor in itself as it is a consequence of the effect of the various factors. In the case of 24/7 Customer.Com Pvt. Ltd. (supra), the Bangalore Bench of this Tribunal considered the relevant OECD guidelines in this respect and held that the exclusion of companies with abnormal profits from the comparables may be in line with the principles enumerated in the OECD guidelines, but the same cannot be said to be in tune with the Indian TP Regulations. The Tribunal noted that there was a deviation in the TP Rules specifically from OECD guidelines by specifying the arithmetic mean for determining the ALP as against the quartile method suggested in the OECD guidelines which excludes the companies that fall in the extreme quartiles for comparability. To the similar effect is another -- decision of Bangalore Bench in the case of Trilogy E-Business Software India Ltd. (supra) wherein it was held that the TP Regulations provide arithmetic mean method for determining the ALP wherein all companies that are in the sample are considered without exception and the average of all the companies is considered as ALP. In the case of Stream International Services Pvt. Ltd.(supra), the Mumbai Bench of ITAT held that comparability is judged primarily by seeing the functional similarity and then the capital employed and risks undertaken but the higher or lower profit rate is not and can never be a relevant criteria to judge the comparability.

15 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 Nevertheless, the OECD TP Guidelines have considered and dealt with the situation of extreme results in the context of comparability consideration in section A.7.3 of chapter III and it is suggested in para 2.63 that where one or more of potential comparables have extreme results consisting loss or unusual high profits, further examination would be needed to understand the reasons for extreme results. After taking into consideration this guidance provided in OECD Transfer Pricing Guidelines and on analyzing the decisions rendered by the Division benches of this Tribunal on this issue after taking into consideration inter alia the T.P. Regulations in India as discussed above, we are of the view that the potential comparables cannot be excluded merely on the ground that their profit is abnormally high. In our opinion, the matter in such case would require further investigation to ascertain the reasons for unusual high profit and in order to establish whether the entities with such high profit can be taken as comparables or not.

14.2.2 As held by the Special Bench of the ITAT in the case of Maersk Global Centres (India) Pvt. Ltd. (supra), the question of whether such companies are to be included or excluded from the final set of comparables will depend on the facts and circumstances of each case; in as much as a potential comparable company earning abnormally high profits margins should trigger further investigation as to whether earning of high profits reflects a normal business condition or whether it is the result of some abnormal condition prevailing in the relevant period to establish whether it can be taken as a comparable or not. The comparable company satisfying the comparability analysis with its high profit should not be rejected solely on the basis of such abnormally high profit margins.

14.2.3 We find from a perusal of the impugned order that the learned CIT (Appeals) has excluded a number of companies from the list of 12 comparables as listed out on page 15 of the impugned order merely because they have high profits in excess of 50%, without examining whether these companies satisfy the comparability analysis. In this factual matrix, respectfully following the decision of the Special Bench of the ITAT, Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd.(supra), we hold that the learned CIT (Appeals) was wrong in excluding 17 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 the companies with profit margins of 50% or more merely because of high profit margins and reverse his finding in the matter and restore the matter to the file of the TPO. The TPO is directed to re-examine and decide on the comparability of the companies excluded by the learned CIT (Appeals) on grounds of abnormal profit in the light of our observations in para 14.2.2 of this order after affording the assessee adequate opportunity of being heard and filing details in the matter. Consequently, Ground No.4 of Revenue’s appeal is allowed as indicated above.

18 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 15.2.2 This issue is now more of academic nature and the judicial decisions cited and relied on by the learned CIT (Appeals) in the impugned order are not applicable as the Act has been amended with retrospective effect from 1.4.2002 by the introduction of the clarificatory amendment in which section 92C(2A) of the Act was inserted as per Finance Act, 2012 and reads as follows :- “ 92C(2A) : Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No.2) Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso.” 15.2.3 The new section 92C(2A) of the Act mandates that if the Arithmetic Mean Price falls beyond + / - 5 % from the price charged in international transactions, then the assessee does not have any option referred to in section 92C(2)of the Act. Thus, as per this amendment, it is clear that the + / - 5 % variation is allowed only to justify the price charged in the international transactions and not for adjustment / standard deduction purposes. The aforesaid amendment has settled the issue and accordingly the 5% standard deduction is not allowable to the assessee in the case on hand. The various judicial decisions cited pertain to the period prior to the retrospective amendment by way of insertion of section 92C(2A) of the Act by Finance Act, 2012 and are therefore not of any help to the assessee. In this view of the matter, we hold that the learned CIT (Appeals) erred in allowing the assessee the benefit of 5% standard deduction and accordingly reverse this order of this issue in view of the retrospective amendment w.e.f. 1.4.2002 brought about by the insertion of Section 92C(2A) of the Act by Finance Act, 2012. Consequently, we allow the ground raised by revenue at S.No.3.

19 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 16. In the result, revenue’s appeal for Assessment Year 2005-06 is partly allowed.

Assessee's Cross Objection in C.O. No.20/Bang/2012.

18.1 In Ground No.3 of the assessee's C.O., the assessee has assailed the decision of the TPO in making the TP Adjustment and the decision of the learned CIT (Appeals) in partially confirming the same. The assessee has raised objections on several grounds, 3(a) to (f), in this regard.

18.2 Further, in the course of proceedings before us, the assessee has made detailed submissions as to why 11 of the 17 comparables chosen by the TPO need to be excluded on various reasons / grounds, application of filters like the upper limit of turnover filter, RPT filter, extraordinary events, non-comparability of the comparable being product companies, etc. It was submitted that the comparable companies chosen by the TPO were not comparable to the assessee on several grounds and that the CIT (Appeals) has adjudicated on the comparability by only considering the RPT filter and abnormal profit margin. The assessee also submitted notes detailing the reasons as to why the 11 companies require to be excluded from the set of comparables and has cited and placed reliance upon several decisions of various Tribunals on each of the same.

We have heard the rival contentions and perused and carefully considered the material on record.

20 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 18.3 Ground No.3(a) – Revised Bench marking.

The issue raised in Ground No.3(a) challenging the comparability analysis of the TPO is general in nature and was not urged before us in the course of appellate proceedings. In this view of the matter, the ground being general in nature and no adjudication being called for thereon, this ground is, therefore, dismissed, as infructuous.

18.4 Ground No.3(b) & 3(c) – Exclusion of certain comparables.

18.4.1 The issue raised in Grounds No.3(b) & 3(c) is regarding certain comparables excluded by the learned CIT (Appeals) and certain other comparables confirmed by the learned CIT (Appeals). As discussed in the issues raised in revenue’s appeal in the case on hand, earlier in this order, the learned CIT (Appeals) had adjudicated on the issue of RPT filter and abnormal profit margins and deleted 13 comparables form the list of 17 comparables chosen by the TPO. It was, however, observed that the learned CIT (Appeals) has not adjudicated on other issues like the upper limit of the turnover filter, abnormal events, RPT filter @ 15%, non-comparability as some of the companies chosen by the TPO are product companies, etc.

18.4.2 Before us, the assessee had submitted detailed submissions on each of the 11 companies which as per the assessee are required to be excluded from the set of 17 comparable companies adopted by the TPO. The learned Authorised Representative submitted that the assessee accepts 6 of the comparable companies adopted by the TPO at S.Nos.1, 2, 5, 8, 11 and 12 of the TPO’s list of 17 comparable companies. The assessee has filed a chart giving the 21 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 reasons why these 11 companies are required to be excluded and the judicial decisions of various Tribunals in support of its contentions.

19.1 The learned Authorised Representative of the assessee has furnished a chart wherein the names of the 5 companies which have turnovers in excess of rs.200 Crores in the relevant period are indicated. It is submitted that in the relevant period, the assessee's turnover is approximately Rs.51 Crores only. It was contended that these companies with turnover in excess of Rs.200 Crores ought to be excluded from the list of comparables as held by the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. reported in 152 TTJ 215. According to the learned Authorised Representative, the following companies fail the turnover filter of Rs.200 Crores :-

Sl.No. Name of the company Turnover in Crores (Rs.) 1. IGate Global Solutions Ltd. (Seg) 406.00 2. Flextronics Software Systems Ltd. 457.45 3. L&T Infotech Ltd. 562.45 4. Satyam Computer Services Ltd. 3,464.20 5. Infosys Technologies Ltd. 6,859.70 19.2 The learned Departmental Representative supported the orders of the TPO in including these companies in the set of comparable companies.

22 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 19.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited and placed reliance upon. We find that a co- ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (supra) has held that turnover is an important filter of comparability which has to be adopted for determination of ALP and has determined the upper limit of the turnover filter to be applied at Rs.200 Crores in cases where the turnover of the assessee is less than Rs.200 Crores. In the case on hand, the turnover of the assessee being approx. Rs.51 Crores only, following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (supra), we direct the Assessing Officer to exclude the above 5 companies from the list of comparable companies.

23 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 20.2 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited and placed reliance on. As contended by the assessee, the co-ordinate bench of this Tribunal, in the case of 24/7 Customer.Com P. Ltd. (supra) at para 13 of its order, has held that companies having RPT in excess of 15% are to be excluded from the list of comparable companies. We, therefore, direct the TPO / A.O. to exclude this company, Four Soft Ltd. from the list of comparables if the RPT of this company is in excess of 15% after verification of the assessee's claim that the RPT is 19.89%. It is ordered accordingly. This objection of the assessee is allowed for statistical purposes as indicated above.

22.1.1 The assessee has sought the exclusion of the following five companies from the list of comparables in respect of which detailed arguments were put forth before us :-

22.1.2 (1) Exensys Software Solutions Ltd. In respect of this company, the assessee submitted that – a) It has diversified operations like, product development, consultancy and ERP implementation, whereas the assessee is only into provision of software development services;

24 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 b) In the period under consideration, M/s. Holool India Ltd. was amalgamated with this company and its accounts are also amalgamated. This distorts the comparability of this company as its activities have become diversified.

In support of its arguments for excluding this company as a comparable, since the assessee in the case on hand is purely a software development service provider, the assessee placed reliance on the decision of the co-ordinate bench in the case of Mindtree (India) Ltd. in IT(TP)A No.70/Bang/2011 dt.21.8.2014 for Assessment Year 2009-10 and Symphony Marketing Solutions (India) Pvt. Ltd. in IT (TP)A No.1316/Bang/2012 for Assessment Year 2008-09.

22.1.3 (2) Tata Elxsi Ltd. The assessee contends that this company is to be excluded from the list of comparables since it is functionally different, being into product design, industrial design, design & engineering services, visual computable labs, systems integration, apart from pure software development services which the assessee offers. In support of its contentions, for exclusion of this company from the list of comparables, the assessee placed reliance on the decisions in the following decision of the ITAT in EMC Data Storage Systems (India) Pvt. Ltd. in IT(TP)A No.1274/Bang/2010 dt.18.7.2014 for Assessment Year 2006-07 and Telecordia Technologies India Pvt. Ltd., in dt.11.5.2012 for Assessment Year 2007-08. 22.1.4 (3) Geometric Software Solutions Ltd. The assessee contends that this company ought to be excluded from the list of comparables as it is mainly product company having developed products like XDPM, Cad-DPM, Visualation etc. whereas the assessee company is a pure software development services provider. In support of 25 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 its arguments for exclusion of this company from the list of comparables, the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Sap Labs India Pvt. Ltd., in dt.30.8.2010 for Assessment Year 2003-04. 22.1.5 (4) Sankya Infotech Ltd. The assessee contends that this company ought to be excluded from the list of comparables since it is functionally different, as it is mainly a software product company developing niche products for the aviation and transportation industry in the areas of simulation, e-learning and training whereas the assessee in the case on hand is purely into provision of software development services. In support of its contentions for exclusion of this company form the list of comparables, the assessee placed reliance on the decision of the co-ordinate bench of the ITAT, Jaipur in the case of Integrated Decisions & Systems India (P) Ltd., in ITA No.271/JP/2011 dt.31.10.2011 for Assessment Year 2006-07. 22.1.6. (5) Thirdware Solutions Ltd. The assessee contends that this company ought to be excluded from the list of comparables, since it is functionally different as it mainly a software product development company and is into licensing and subscription of software, whereas the assessee in the case on hand is only into provision of software development services. In support of its contentions for exclusion of this company from the list of comparables, the assessee placed reliance on the decision of the Pune Bench in the case of E-gain Communication Pvt. Ltd. in ITA No.1685/PN/2007 dt.10.6.2008 for Assessment Year 2004-05.

26 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 22.2 Per contra, the learned Departmental Representative contended that the issues raised by the assessee for the exclusion of the above five companies from the list of comparables, such as functional differences are matters of fact that could differ from year to year, from one comparable company to another and also there could be changes in the profile and operations of the assessee in the case on hand. It was further submitted by the learned Departmental Representative that most of the judicial decisions relied on by the assessee for exclusion of the aforesaid five companies cannot be applied across the board as they pertained to different assessment periods than Assessment Year 2005-06 which is before the Tribunal in the case on hand. The learned Departmental Representative submitted that, in these circumstances, the issue of the comparability of the above five companies requires to be restored to the file of the TPO for fresh examination in the light of the submissions made and a fresh FAR analysis carried out to decide factually whether these five companies ought to be excluded from the list of comparables. 22.3 We have heard the rival contention of both parties and perused and carefully considered the material on record, including the judicial decisions cited by the assessee (supra). On a perusal of the impugned order of the learned CIT(A), we find the learned CIT(A) has not considered and adjudicated on the issues raised by the assessee and the submissions made by the assessee in this regard are not examined. We therefore deem it appropriate to remand the issue of the comparability of the aforesaid five companies, challenged by the assessee on grounds of functional difference, for fresh consideration by the TPO. While examining the comparability of these companies, the A.O/TPO should consider the submissions made by the 27 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 assessee and the applicability of the judicial decisions cited by the assessee to the facts of the assessee's case in the period under consideration. It is ordered accordingly.

30 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 26. Ground No. 3(g) – Risk Adjustment. 26.1 Ground No.3(g) of the assessee's C.O. is regarding the action of the TPO & CIT (Appeals) in not granting adjustment towards the difference in risk profile between the assessee and the comparable companies chosen by the TPO to bring them on par with the assessee. The plea was reiterated before us. 26.2 In respect of the assessee’s claim for risk adjustment, the learned Departmental Representative submitted that the TPO has elaborately discussed the matter at para 15.2 of the order under section 92CA of the Act and rightly rejected the claim, as the assessee failed to quantify its claim of risk adjustment. 26.3 We have heard the rival contentions and perused the material on record. On a perusal of the TPO’s order under section 92CA of the Act, we find that the TPO has considered this issue at para 15.2 thereof. The TPO observes that the primary burden when making a claim is on the tax payer and he has not provided any quantification of its risk adjustment claim. In this view of the matter, the TPO did not allow the assessee risk adjustment. We are in agreement with the observation of the TPO. We find that the assessee, in the case on hand, apart from making the claim for risk adjustment, has failed to provide any quantification of this claim for the Assessing Officer to make an assessment of the claim. In our view, if the assessee makes a claim, the burden is upon the assessee to provide the basis of quantification for such claim so that it can be considered. In the case on hand the assessee has failed to do so, both before the TPO and also at the appellate forums. While it is true that in certain cases the co-ordinate benches of this Tribunal have held that the TPO ought to consider allowing risk adjustment to 31 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 bring the assessee on par with the margin of the comparables and with which we have no quarrel, in the case on hand, we find that except for raising the claim for risk adjustment, the assessee ;has failed to substantiate the claim with any quantification so that it can be basis for examination by the TPO In a recent decision of the co-ordinate bench in the case of CISCI Systems (India) P. Ltd., in IT(TP)A No.271/Bang/2014, the bench noted that risk adjustment was not allowed by TPO for the reason of chance of proper basis for quantification. Since such quantification was placed before the Tribunal, the bench directed the TPO to examine and consider the assessee's claim. In the case on hand it is not so. We are, therefore, of the opinion that in the case on hand, the assessee has failed to make its case for being allowed risk adjustment and concur with the order of the TPO in not allowing the assessee risk adjustment in the facts and circumstances of this case. Consequently, the ground raised at 3(g) by the assessee is dismissed.

27. Ground No.4 : Reimbursement of Expenses considered as part of operating cost. 27.1 In this C.O. the assessee contends that the reimbursements received by the assessee from its AEs and those reimbursements paid by the assessee to its AEs are not in respect of any services rendered and therefore should not be added back to the cost base for the purposes of a mark-up. 27.2 We have considered the rival contentions and submissions and perused and carefully considered the material on record. It is settled principle that if the reimbursements are mere pass through expenses without any service element, then the same should not be added back to the cost base for the purposes of mark up. We, however, find that both the TPO and the 32 IT(T.P)A No. 1110/Bang/2011 & C.O. No.20/Bang/2012 learned CIT (Appeals) have decided the issue without examining the details of the expenses involved. The break-up of the said expenses are not given in detail and the claim that these expenses have been actually incurred by the assessee on behalf of the AEs and vice versa have not been examined. We therefore deem it fit to remit the issue to the file of the Assessing Officer / TPO for detailed verification. We make it clear that if the receipts are mere recovery of expenses without any service element, then the same should not be added back to the cost base for the purpose of mark-up. It is ordered accordingly. Consequently, Ground No.4 of the assessee’s C.O. is treated as allowed for statistical purposes.