Vildirect: IncomeTax-caselaws-2016-VIL-974-ITAT-BLR

2016-VIL-974-ITAT-BLR

Income Tax Appellate Tribunal BANGALORE

IT (TP) Appeal Nos. 441 and 442 (Bang.) of 2012

Date: 02.02.2016

ARIBA TECHNOLOGIES INDIA (P.) LTD.

INCOME TAX OFFICER, WORD 11 (1) , BANGALORE,

P.K. Prasad, CA for the Appellant.
P.K. Sri Hari, Addl. CIT (DR) for the Respondent.

BENCH

Vijaypal Rao, Judicial Member And Inturi Rama Rao, Accountant Member

JUDGMENT

Vijaypal Rao, Judicial Member –

These cross appeals are directed against the order dated 31.12.2012 of Commissioner of Income Tax (Appeals)-IV, Bangalore for the Assessment Year 2007-08. The assessee has raised the following grounds in its appeal:

"The grounds taken by the Appellant are without prejudice to one another.

1. That the order passed by the learned Commissioner of Income Tax (Appeals) - IV, Bangalore ('CIT (Appeals)'), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.

2. That the learned CIT (Appeals) erred in upholding the rejection of Transfer Pricing ('TP') documentation by the learned Transfer Pricing Officer ('TPO')/Assessing Officer ('AO') and in making an adjustment to the transfer price of the Appellant in respect of its software development services by Rs. 76,95,410 and in the information technology enabled services by Rs. 20,31,990.

3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in;

(a) Upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis performed by the learned TPO in the TP Order.

(b) Performing his own comparability analysis by 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 software development and information technology enabled services of the Appellant, on rejecting companies that are otherwise functionally comparable to the Appellant and on inclusion of companies that otherwise fail the test of comparability.

(d) Rejecting the segmental companies in the information technology enabled services segment only for the reason that the software development service segment of these companies were not comparable to that of the Appellant.

(e) Disregarding application of multiple year/prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2006-07) data for companies should be used for comparability.

(f) Upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm's length price.

(g) 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 ('Act') that was not available to the Appellant in the public domain.

(h) Not providing any adjustment towards the difference in the risk profile between the Appellant and the entrepreneurial companies selected as comparables while determining the arm's length price.

4. Consequent to the above adjustment, the learned CIT (Appeals) erred in directing the learned AO to levy interest under section 234B of the Act."

2. The assessee is a subsidiary of Ariba Technologies, Netherland B.V. which is in turn subsidiary of Ariba Inc US. The business of the assessee is engaged in providing software development and Information Technology Enabled Services (ITES) to its Associate Enterprise on a cost plus basis. Thus the assessee is providing services in two segments i.e. software development services and ITES. The financial results reported by the assessee are as under :-

Description	Software Development Services	IT enables Services (Rs.)	Amount (Rs.)
Operating Revenue	Rs. 18,28,00,964/-	8,66,47,650/-	26,94,48,614/-
Operating Cost	Rs. 16,10,69,406/-	7,30,18,028/-	23,40,87,434/-
Operating Profit (PBIT)	Rs. 2,17,31,558/-	3,53,61,181/-	3,53,61,180/-
Operating Profit to Cost Ratio	13%	19%

3. The assessee has reported international transactions in these two segments as under :-

1.	Contract Software Development Services	Rs. 18,28,00,964/-	Readjustment done by TPO
2.	IT enabled Services	Rs. 8,66,47,650/-	Readjustment done by TPO

4. The assessee in its T.P. analysis has bench marked its international transactions by adopting Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) and operating profit to total cost (OP/TC) as Profit Level Indicator (PLI).

First we will take up the software development services segment.

5. The assessee selected 18 comparables for bench marking its international transactions and arrived at Mean Margin of 11.30% as under :

Sl. No	Comparable Company	Without Adjs. Markup on Total Cost
1.	Bodhtree Consulting Limited (Seg)	18%
2.	F C S Software Solutions Ltd.	14%
3.	Goldstone Technologies Ltd.	3%
4.	Larsen & Toubro Infotech Ltd.	11%
5.	Melstar Information Technologies Ltd.	0%
6.	Orient Information Technology Ltd	-6%
7.	Powersoft Global Solutions Ltd	19%
8.	SIP Technologies & Exports Ltd	25%
9.	Sonata Software Ltd.	9%
10.	Synetairos Technologies Limited	11%
11.	Trident Info-Tech Corpn.Ltd	66%
12.	VJIL Consulting Ltd	7%
13.	Akshay Software Technologies Ltd.	7%
14.	Cambridge Technology Enterprises Ltd.	21%
15.	I C R A Techno Analytics Ltd.	15%
16	Mindtree Consulting Limited	11%
17	Computech International Limited	7%
18	Karuturi Networks	4%

6. Thus the assessee claimed its international transactions in software development services segment at arm's length having operating profit at 13%. The TPO rejected the TP analysis of the assessee on various grounds including the assessee has used multiple year data instead of current year. The TPO carried a fresh search and selected 26 comparables. The set of comparables selected by the TPO are as under :

Sl. No.	Comparable Company Name	OP to Total Cost % as per TP Order(after WC)
1.	Accel Transmatic Ltd (Seg)	19.16
2.	Avani Cincom Technologies Ltd	50.12
3.	Celestial Labs Ltd	53.20%
4.	Datamatics Ltd	-1.48
5.	E-zest Solutions Ltd	35.05
6.	Flextronics Software Systems Ltd	24.08
7.	Geometric Ltd (Seg)	8.71
8.	Helios & Matheson Information technology	33.43
9.	I Gate Global Solutions Ltd	4.72
10.	Infosys Technologies Ltd	37.95
11.	IshirInfotech Ltd	29.42
12.	KALS Information Systems Ltd (Seg.)	22.47
13.	LGS Global Ltd (Lanco Global Solutions Ltd)	14.22
14.	Lucid Software Ltd	16.11
15.	Mediasoft Solutions Ltd	0.70
16.	Megasoft Ltd (Seg)	50.26
17.	Mindtree Consulting Ltd	14.43
18.	Persistent Systems Ltd	22.47
19.	Quintegra Solutions Ltd	8.33
20.	R S Software (India) Ltd	12.21
21.	R Systems International (Seg)	12.32
22.	Sasken Communication Technologies Ltd (Seg)	20.13
23.	S I P Technologies & Exports Ltd.	9.79
24.	Tata Elxsi Ltd (Seg)	25.20
25.	Thirdware Solutions Ltd	20.57
26.	Wipro Ltd	33.48

As it is clear from the set of comparables selected by the assessee and TPO only two comparables are common which are mentioned at Sl. Nos. 19 & 23 of the TPO's list. The TPO has arrived at the AM of the comparables after working capital adjustment at 22.19% in comparison to the assessee's operating margin at 13%. Thus the TPO proposed to make an upward adjustment of Rs. 1,39,53,888. The Assessing Officer made the corresponding addition on account of TP adjustment as proposed by the TPO while passing the assessment order. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) and raised the objections against the companies selected by the TPO as comparable in respect of the international transactions pertain to software development services segment. The CIT (Appeals) excluded 23 companies from the set of comparable companies selected by the TPO and retain only 3 companies which are as under :-

Sl.No.	Company Name	OP to Total Cost % (before working capital adjustment)	OP to Total Cost % (after working capital adjustment)
1.	E-Zest Solutions Ltd.	36.12	35.0535.05
2.	KALS Information Systems Ltd. (Seg.)	30.55	22.47
3.	Lucid Software Ltd.	19.37	16.11
	Mean Margin After Working Capital Adjustment 73.63/3		24.54

7. Thus the CIT (Appeals) has deleted/excluded all the companies selected by the TPO against which the assessee raised objections except KALS Information Systems (seg.) and Lucid Software Ltd. The assessee did not raised any objections against eJust Solutions. Accordingly the CIT (Appeals) recomputed the Mean Margin of three companies after working capital adjustment at 24.54% and confirmed the TP adjustment to the extent of 77, 410 as against the original 1,39,53,888. The CIT (Appeals) granted part relief to the assessee in respect of the TP adjustment in software development services segment. While rejecting the 23 companies from the list of comparable companies, the CIT (Appeals) applied filter of 0% revenue from Related Party Transactions (RPT). Therefore, the revenue as well as the assessee are aggrieved by the impugned order of the CIT (Appeals) and filed the respective appeals before the Tribunal.

8. First we will deal with the issue of adopting filter of 0% revenue from RPT whereby the CIT (Appeals) has excluded as many as 23 comparables from the list selected by the TPO.

9. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The TPO has applied the filter of 25% RPT whereas the assessee has contended that the filter of revenue from RPT should be applied at 15% instead of 25% applied by the TPO. The learned Departmental Representative has submitted that there is no standard rule for applying the filter of 15% regarding the RPT. It is pertinent to note that the ALP as per the provisions of the TP has to be determined by considering uncontrolled comparable prices and therefore only unrelated prices have to be taken into account to bench marked international transactions. However, 0% RPT of the comparable price is an impossible situation and therefore a reasonable tolerance range from revenue from RPT can be considered for selecting uncontrolled comparables. There is no dispute that there cannot be a single criteria/parameter to be applied as a general rule in all the cases. The tolerance range varies from case to case and depending upon the availability of comparables for a particular case. Thus if the comparables of an international transactions are easily available in sufficient number then this tolerance range of RPT should be restricted to minimum. Though there is no specified range in the provisions of Act or Rules, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, a commonly accepted tolerance range of 5% to 25% of total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case of the assessee before us, the assessee itself has selected 18 comparables and the TPO/A.O. selected 26 comparables. Therefore, the availability of the comparables of the international transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. Consequently, the impugned order of the CIT (Appeals) whereby applied filter of 0% RPT is set aside. Hence we direct the Assessing Officer/TPO to apply the RPT filter of 15% and then select the comparables.

10. Now we will take up the functional comparability of the other companies selected by the TPO/A.O.

10.1.1 Accel Transmatic Ltd. (Seg.) : This company was selected by the TPO for determining the ALP. Though the assessee has not contested the inclusion of this company in the list of comparables by the TPO however, this company was excluded by the CIT (Appeals) by applying 0% RPT filter. In view of our finding on the issue of RPT filter, we find that the assessee has claimed that this company is having 19.29% of revenue from RPT. On the other hand as it is clear from the details reproduced by the CIT (Appeals) in para 2.10 of the impugned order that the RPT revenue is 6.2% of the sales. Therefore, there are contradictory claims on behalf of the parties. The learned Authorised Representative of the assessee has further contended that this company is engaged in the product manufacturing activity and has shown manufacturing expenditure in the books of accounts which is 7.88 % of total expenditure. He has referred to the relevant part of the Annual Report and submitted that this company is engaged in the business of diversified activities like transmatic system, Accel IT Academy and Accel Animation Studio. Further, there is an extra ordinary event when this company hived of its division to a subsidiary and this company has started its animation division. Thus the learned Authorised Representative has submitted that this company is otherwise not comparable with that of the assessee. He has pointed out that this Tribunal in assessee's own case for the Assessment Year 2006-07 has excluded this company from the list of comparables. He has also relied upon the following decisions :-

Cases Pertaining to asst. year : 2007-08	Cases Pertaining to other asstt. years
Trilogy E Business Software v. Dy. CIT [2013] 140 ITD 540/29 taxmann.com 310 (Bang. - Trib.)	Ariba Technologies India (P.) Ltd. (IT (TP) No. 1179 (Bang.) of 2010
Bearing Point Business Consulting (P.) Ltd. v. Dy. CIT [2013] 57 SOT 244/33 taxmann.com 92 (Bang. - Trib.)
First Advantage Offshore Services (P.) Ltd. [IT(TP)A No. 1086 (Bang.) of 2011, AY 2007-08]
Huawei Technologies India (P.) Ltd. v. Asstt. DIT [2014] 149 ITD 323/44 taxmann.com 296 (Delhi - Trib.)
CSR India (P.) Ltd. v. ITO [2013] 31 taxmann.com 265 (Bang. - Trib.)

10.1.2 On the other hand, the learned Departmental Representative has submitted that the CIT (Appeals) has not examined the functional comparability of this company and rejected the same/excluded the same by applying 0% RPT filter. He has relied upon the finding of the TPO and submitted that the TPO has examined the functional comparability of this company and the assessee did not dispute before the TPO or before the CIT (Appeals).

10.1.3 We have considered the rival submissions as well as relevant material available on record. Therefore, this company cannot be excluded from the list of comparables. There is no dispute that the assessee did not object this company as comparable by the TPO. Even before the CIT (Appeals) the assessee did not raise any objection for inclusion of this company. However, the CIT (Appeals) has excluded this company by applying 0% RPT filter. Thus the revenue is aggrieved by the order of the CIT (Appeals) on the issue of applying 0% RPT filter. As regards the functional comparability of this company, this issue does not emanate as the assessee did not raise any objection against the comparability of this company. Further the assessee has not filed any additional ground for exclusion of this company from the list of comparables. We find that the revenue from RPT of this company is 6.40% and therefore it is much below the threshold of 15% as discussed in the foregoing paragraphs. Thus in the absence of any objections on the functional comparability of this company by the assessee either before the authorities below or before us by way of additional ground, we restore this company to the list of comparables.

10.2.1 Avani Cincom Technologies Ltd. : The assessee objected the inclusion of this company in the list of comparables on the ground of functional dis-similarity. The CIT (Appeals) instead of deciding the functional dis-similarity has excluded this company by applying the RPT filter at 0%.

10.2.2 Before us, the learned Authorised Representative of the assessee has submitted that this company is engaged in the software development services and IT services travel solutions, insurance solutions, relationship management, etc. There is no segmental data available in respect of software development services. Therefore this company cannot be considered as a good comparable of the assessee. In support of his contention, he has relied upon the following decisions :

Cases Pertaining to asst. year

Trilogy E Business Software (supra)

Bearing Point Business Consulting (P.) Ltd. (supra)

CSR India (P.) Ltd. (supra)

Huawei Technologies India (P.) Ltd. (supra)

EMC Data Storage Systems (India) (P.) Ltd. [IT(TP) Appeal No. 973 (Bang.) of 2010]

10.2.3 On the other hand, the learned Departmental Representative has supported the finding of the TPO and submitted that the TPO found this company is engaged in the similar business activity as of the assessee and therefore it is a good comparable.

10.2.4 We have considered the rival submissions as well as relevant material on record. The learned Authorised Representative has contended that this company is engaged in the diversified activity which are dis-simialr to the assessee. He has asserted that this company is engaged in the software development and IT services and there is no segmental data available for software development. In support of his contention, he has relied upon various decisions. After going through the Annual Report of this company as well as the auditor's report, we find that this company is a software service provider and does not require to hold inventories as clearly reported by the auditor of the assessee. Further this company has received the revenue of Rs. 3,54,77,523 as earning in foreign exchange of software export services. From the profit and loss account, this company has reported only one source of income from operations and that is export in foreign currency. Apart from this revenue, only a minor amount has been shown from the interest in the profit and loss account. Further, we find that there is no other revenue generating source during the year under consideration. Therefore, we find from the Annual Report of the company, there is one segment i.e. software exports. Thus the contention of the assessee is that this company is in the diversified activity is not found support from the record and therefore it is contrary to the record. The decisions relied upon by the assessee also does not give any finding of fact on functional dissimilarity but the earlier order of the Tribunal in some other cases has been followed in these decisions. There is no independent finding by analysing the facts on record in these decisions. Therefore when we analyse the relevant record and details as given in the annual report, profit and loss account and auditor's report, we find that this company has earned revenue from only one source which is software exports in foreign currency. Accordingly, we do not find any merit in the objections raised by the assessee in this appeal. As regards the high profits, the same itself is not a ground for exclusion of this company or treating the same as not comparable until and unless any extra ordinary event occured during the year which has resulted abnormal profit. Therefore, only the extra ordinary event which could have resulted in abnormal results or income of the comparable company can be considered as a reason for exclusion but if the company is earning comparably high profits from its normal business activity, then the same itself is not a ground for exclusion, if otherwise comparable to that of the assessee. Accordingly, we set aside the order of the CIT (Appeals) excluding this company on the ground of related party filter at 0% and restore the order of the TPO/A.O. on functional comparability of this company.

10.3 Celestial Labs Limited :

As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:-

♦ In the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act."

♦ As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred."

♦ An amount of Rs. 11,692,020/- has been debited to the Profit and Loss Account as "Deferred Revenue Expenditure" (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company.

It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R&D activities is bad in law.

Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma (P.) Ltd. v. Addl. CIT [IT Appeal No. 6623 (Mum.) of 2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment was examined.

10.3.1 It was submitted by Ld A R of the assessee that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. Thus this company cannot be considered as a comparable of assessee for the reason that this company has diverse business and this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different.

10.3.2 On the other hand Ld D R has relied upon the order of the TPO and submitted that this company has been classified as software development company and therefore the main activity is similar to that of assessee.

10.3.3 We have considered the rival submissions as wellas relevant material on record. The business activities of this company has been examined and analysed by the Mumbai Bench of the Tribunal in the case of Teva Pharma (P.) Ltd. (supra) wherein the tribunal has observed as under:

"The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows:

'The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.'

According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard.' "

Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. Having regard to the above facts and circumstances as well as the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma (P.) Ltd. (supra) we are of the view that this company was basically in clinical research and manufacture of bio products and other products and therefore, this company cannot not be considered as good comparable of assessee.

10.4 Datamatrics Ltd. : This company is not disputed or contested by any of the parties though the CIT (Appeals) has deleted this company from the list of comparables on the ground of related party transactions. We find that the revenue from RPT of this company is 13.1% and therefore it is much below the threshold of 15% as discussed in the foregoing paragraphs. Thus in the absence of any objections on the functional comparability of this company by the assessee either before the authorities below or before us by way of additional ground, we restore this company to the list of comparables.

10.5 E-zest Solutions Ltd. : This company is not disputed or contested by the assessee, the CIT (Appeals) has also found that it is a comparable, accordingly, there is no specific finding is called for on this company.

10.6.1 Flextronics Software Ltd. (Seg.) : The assessee objected against the inclusion of this company in the list of comparables on the grounds that it fails the R&D filter as well as having diversified segments. The CIT (Appeals) excluded this company on the ground of RPT. Before us, the learned Authorised Representative of the assessee has submitted that this company is engaged in the R&D activities giving raise to Intellectual Property Rights (IPR). Therefore this company is dis-similar to that of the assessee. He has relied upon the following decisions :

Cases Pertaining to asstt. year
♦ DE Shaw India Software (P.) Ltd. v. Asstt. CIT [2014] 42 taxmann.com 74 (Hyd. - Trib.) has been upheld by the high court for the state of Telangana and Andhra Pradesh - ITTA No. 433 of 2014 dated 22 July 2014.
♦ Motorola Solutions India (P.) Ltd. v. Dy. CIT [[2013] 36 taxmann.com 46/144 ITD 246 (Delhi - Trib.)

10.6.2 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and submitted that this company is similar to that of the assessee and this is a good comparable for determining the ALP of international transactions.

10.6.3 Having considered the rival submissions and relevant material on record, we find that the functional comparability of this company has been examined by this Tribunal in the case of DE Shaw India Software (P.) Ltd. (supra). The Hyderabad Bench of this Tribunal has discussed the comparability of this company in para 27 at page 13 of the order as under :-

"27. Flextronics Software Ltd. and Thirdware Software Solutions Ltd. : The assessee has objected to these two companies to be treated as comparable mainly on the ground that both these companies are into product development. We find that in case of Intoto Software India Pvt. Ltd. (supra) the co-ordinate bench of this Tribunal having found that these two companies are functionally different as they are into product development has directed excluding these companies for comparability analysis. Respectfully following the decision of the co-ordinate bench of this Tribunal incase of M/s. Intoto Software India Pvt. Ltd. (supra) we also direct the Assessing Officer/TPO to exclude both these companies."

It has been brought to our notice that the finding of the Tribunal in case of DE Shaw India Software Pvt. Ltd. has been upheld by the Hon'ble High Court. By following the decision of the coordinate Bench at Hyderabad as well as Hon'ble High Court, we direct the TPO/A.O. to exclude this company from the list of comparables for determining the ALP.

10.7.1 Geometric Ltd. (Seg.) : The assessee objected the inclusion of this company before the TPO. The CIT (Appeals) excluded this company from the set of comparables on the ground of RPT filter.

10.7.2 We have heard the rival submissions and considered the material on record. It is not disputed that the Related Party revenue is 19.98% of total sale of this company. Therefore, this company fails the filter of threshold limit of 15% RPT. Accordingly, we do not find any reason to interfere with the finding of the CIT (Appeals) to exclude this company from the list of comparables.

10.8 Helios & Matheson Information Technology and I gate Global Solutions Ltd. : The assessee did not object to the inclusion of these two companies before CIT (Appeals) or even before this Tribunal. The revenue is aggrieved only on account of applying the 0% RPT filter by the CIT (Appeals). In view of our finding of tolerance range of RPT, these two companies are restored to the list of comparables of TPO.

10.9.1 Infosys Technologies Ltd. : The assessee objected to this company before the TPO on the ground of brand value having tangibles, research and development expenses, software products, etc. The CIT (Appeals) deleted this company from the list of comparables on the ground of RPT.

10.9.2 Before us, the learned Authorised Representative of the assessee has submitted that this company owns brands and intangibles and also having diversified operations as reported in the Annual Report of this company, this company earns from software products and no separate segmental data are reported. Therefore, in the absence of segmental data available, this company cannot be considered as good comparable of the assessee. This company also is engaged in the activities of R & D. In support of his contention he has relied upon the following decisions :

Cases pertaining to Asstt. Year 2007-08	Cases pertaining to other Asst. Years
Triology E-Business Software India (P.) Ltd. (supra)	Ariba Technologies India (P.) Ltd. v. ITO IT (TP) Appeal No. 1179/Bang/2010.
CSR India (P.) Ltd. (supra)	Agnity India Technologies (P.) Ltd. [ITA No. 3856 (Delhi) of 2010, dated 17-6-2010] ITAT, Delhi. This ruling has been upheld by the High Court in CIT v. Agnity India Technology (P.) Ltd. [2013] 219 Taxman 26/36 taxmann.com 289. Scale of operation, brand value, etc.

10.9.3 On the other hand, the learned D.R. has relied upon the findings of the TPO and submitted that this company is in business of software development services and therefore except for minor variations, this company is comparable with the assessee.

10.9.4 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 We are inclined to agree 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. The functional comparability of this company has been examined by the Delhi Bench of this Tribunal in case of Agnity India Technologies (P.) Ltd. (supra) and the finding of the Tribunal has been upheld by the Hon'ble Delhi High Court that this company cannot be compared with an ordinary entity because of the scale of operations and brand value. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. Accordingly we direct the TPO/AO to exclude this company from the list of comparables for determining the ALP. It is ordered accordingly.

10.10.1 Ishir Infotech Ltd. : The assessee objected to the inclusion of this company on the ground of RPT at 22%. The CIT (Appeals) excluded from the list of comparables by applying the filter of RPT.

10.10.2 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that the RPT revenue earned by this company is 21.97% as stated by the TPO as well as by the CIT (Appeals). In view of our finding on this issue the RPT of this company exceeds the threshold limit of 15%. Accordingly this company fails the RPT filter and is directed to exclude from the list of comparables.

10.11.1 KALS Information Systems Ltd. (Seg.) : The assessee objected the inclusion of this company on the ground of functional dis-similarity and absence of segmental data. The CIT (Appeals) upheld the functional comparability of this company and inclusion of this company as comparable by the TPO.

10.11.2 Before us, the learned Authorised Representative has submitted that this company is not functionally comparable to the assessee as this company is a software product company. He has referred to Annual Report of this company and particularly the balance sheet and Profit & Loss Account and submitted that this company has shown inventories in the financial accounts and also shown the revenue earned from the sales, services and training. He further submitted that there is no segmentation of revenue available. He has relied upon the following decisions:

Cases pertaining to Asst. year : 2007-08

Bearing Point Business Consulting (P.) Ltd. (supra)

Trilogy E-Business Software India (P.) Ltd. (supra)

PTC Software (India) (P.) Ltd. v. Asstt. CIT [2012] 28 taxmann.com 412 (Pune - Trib.)

CSR India (P.) Ltd. (supra)

Huawei Technologies India (P.) Ltd. [IT(TP) A. No. 583 (Bang.) of 2012]

Ariba Technologies India (P.) Ltd. (supra)

10.11.3 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that the functional comparability of this company has been examined by the TPO as well as by the CIT (Appeals) and therefore this company is found as a good comparable.

10.11.4 We have considered the rival submissions and the relevant material on record. At the outset we note that the functional comparability of this company has been examined by this Tribunal in assessee's own case for the Assessment Year 2006-07 wherein the Tribunal has held in paras 12 and 13 as under :

'12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt. Ltd. (supra):

"(d) KALS Information Systems Ltd.

As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India (P.) Ltd. v. Dy. CIT IT Appeal No 1386/PN/2010 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:

"16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds."

Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.

We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable."

"(e) Accel Transmatic Ltd.

48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd. v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows:

"In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under.

(i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system

(ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development

(iii) Accel IT Academy (the net stop for engineers)-training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO

(iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development.

4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin."

Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO.

50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd. (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables."

13. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Triology E-Business Software India Pvt.Ltd. (supra). Respecfully following the decision of the Tribunal referred to above in the case of Triiology E-Business Software India Pvt.Ltd. (supra), we direct that KALS InfoSystems Ltd. And Accel Transmatic Ltd. be excluded from the list of 20 comparable arrived at by the TPO.'

10.11.5 We further note that the functional comparability of this company with that a similar view has been taken by this Tribunal in the said case as well as in other cases cited supra. Accordingly, by following the earlier decisions of this Tribunal and in view of the fact that the nature of functions and business which is the source of revenue of this company is software products and therefore this company cannot be a good comparable for determining the ALP. Accordingly, we direct the A.O./TPO to exclude this company from the list of comparables for the purpose of determining the ALP.

10.12 LGS Global Ltd. : The assessee did not object for the inclusion of this company either before the TPO or before this Tribunal. The CIT (Appeals) has excluded this company from the list of comparables on the ground of RPT filter applied at 0%. In view of our finding on the tolerance range of RPT in the case of assessee at 15%, we restore this company to the list of comparables for determining the ALP. Accordingly, the impugned order of the CIT (Appeals) is set aside to the extent of exclusion of this company and the order of the TPO is restored.

10.13.1 Lucid Software Ltd. : The assessee objected the inclusion of this company in the list of comparables on the ground of functional dis-similarity. The CIT (Appeals) has confirmed the inclusion of this company in the list of comparables and rejected the contention of the assessee.

10.13.2 Before us, the learned Authorised Representative has submitted that this company is a software product company. The company has debited the expenditure to the profit and loss account as work in progress. Further, this company has employed about 30% of total capital in product development expenditure as per the balance sheet. The learned Authorised Representative has pointed out that the Tribunal in assessee's own case for the Assessment Year 2006-07 has excluded this company from the list of comparables. He has relied upon the following decisions :

Cases pertaining to Asst. year : 2007-08 Cases pertaining to other Asst. years

CSR India (P.) Ltd. (supra)	Ariba Technologies India (P.) Ltd. (supra)
DE Shaw India Software (P.) Ltd. (supra). This Tribunal ruling has been upheld by the high court for the State of Telangana and Andhra Pradesh - ITTA No. 433 of 2014 dated 22 July 2014
Huawei Technologies India (P.) Ltd. (supra)

10.13.3 On the other hand, the learned Departmental Representative has submitted that the functional comparability of this company has been examined by the TPO as well as by the CIT (Appeals) and it was found that this company is functionally comparable with that of the assessee. He has relied upon the orders of the authorities below.

10.13.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of this company has been examined by this Tribunal in assessee's own case for the Assessment Year 2006-07 wherein the Tribunal has held in paras 14 & 15 are as under :

"14. The learned counsel for the Assessee brought to our notice that the comparable company chosen by the TPO viz., Lucid Software Limited, has to be excluded as functionally not comparable with that of the assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. in ITA No. 7821/MUM/2011, which was followed by the ITAT Bangalore Bench in the case of Logica Private Ltd. ITA No. 1129/Bang/2011 for AY 07-08, wherein it was held as under:-

7.2 Lucid Software Limited

It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio.

In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee.

** ** **

15. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Logica Private Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Logica Pvt. Ltd. (supra), we direct that the company viz., Lucid Software be excluded from the list of 20 comparable arrived at by the TPO."

Similar view has been taken by the co-ordinate benches of this Tribunal in the other cases cited supra. Accordingly, following the earlier orders of this Tribunal in assessee's own case for the Assessment Year 2006-07 as well as in the other cases, we direct the A.O./TPO to exclude this company from the list of comparables to determine the ALP.

10.14 Mediasoft Solutions Ltd. : The assessee did not object the inclusion of this company in the list of comparables. However, the CIT (Appeals) has excluded this company from the list of comparables on functional dis-similarity. Since neither the assessee nor the revenue contested against the exclusion or inclusion of this company, therefore, no specific finding is required in respect of this company and the finding of the CIT (Appeals) is upheld.

10.15.1 Megasoft Ltd. : The assessee objected the inclusion of this company on the ground of functional dis-similarity as well as different financial year followed by this company. The CIT (Appeals) has excluded this company on the ground of RP T as well as functional dis-similarity.

10.15.2 Before us, the learned Authorised Representative has submitted that there is an extra ordinary event during the year under consideration as there is an amalgamation of this company. Further this company follows a different financial year ending and therefore, the financial results are not contemporaneous and cannot be compared with assessee. In support of his contention, he has relied upon the following decisions :

Cases pertaining to Asst. year : 2007-08

Trilogy E-Business Software India (P.) Ltd. (supra).

Huawei Technologies India (P.) Ltd. (supra)

10.15.3 On the other hand, the learned Departmental Representative has submitted that the alleged extra ordinary event has not affected the business model or functions of this company, therefore, the same itself cannot be a reason for exclusion of this company from the list of comparables. He has relied upon the order of the TPO.

10.15.4 We have considered the rival submissions. At the outset, we note that the comparability of this company has been examined by the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India (P.) Ltd. (supra). In the subsequent decision in the case of Huawei Technologies India (P.) Ltd. (supra), the Tribunal has again examined the functional comparability of this company in paras 26 & 27 as under :-

'26. As far as Sl. No. 24 viz., Megasoft Ltd. of the list of comparables chosen by the TPO given in the chart at para-12 of this order is concerned, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) had held that only segmental data should be taken for the purpose of comparison. Following are the relevant observations of the Tribunal:-

"37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if-

(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

38. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services."

27. In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison.'

In view of the decision of the co-ordinate bench of this Tribunal, we hold that the segmental margins of this company relating to providing software services are comparable to the assessee's software development service segment and therefore we direct the A.O./TPO to consider only segmental data relating to providing software services of this company i.e. Megasoft Ltd.

10.16 Mindtree Consulting Ltd. : The assessee has not objected to this company to be included in the list of comparables. The CIT (Appeals) has excluded this company from the list of comparables on the ground of on-site revenue filter. Since neither the assessee nor the revenue has seriously objected to the inclusion or exclusion of this company from the list of comparables, therefore, no specific finding is required in respect of this company. The order of the CIT (Appeals) is upheld on this issue.

10.17 Persistent Systems Ltd. : Neither the assessee nor the revenue has contested the inclusion of this company, therefore, no specific finding is required.

10.18 Quintegra Solutions Ltd., R.S. Software (India) Ltd. and R.S. International (Seg.) : The assessee has not contested in respect of these companies. In case of Persistent Systems Ltd., the CIT (Appeals) has excluded this company by applying 0% RPT filter. In view of our finding on this issue, this company is restored back to the list of comparables as the assessee has not raised any objection for inclusion of this company. In case of Quintegra Solutions Ltd. v. ITO [2013] 30 taxmann.com 105 (Chennai - Trib.) the CIT (Appeals) has excluded this company on the ground of on-site revenue filter. The assessee has not raised any objection against the exclusion or inclusion of this company. However, the revenue has not contested seriously against this company, therefore, no specific adjudication is required on this comparable. Incase of R S Software (India) Ltd., the CIT (Appeals) has excluded this company on RPT sale filter. Similarly, in case of R Systems International, the CIT (Appeals) has excluded this company on RPT filter as well as functional dis-similarity. The assessee has not objected for the exclusion or inclusion of this company, therefore, in the absence of any specific objection by any of the parties in respect of RS Software India Ltd., we do not find any reason to interfere with the order of the CIT (Appeals). As regards R Systems International, the revenue has raised this issue in the appeal, though the assessee has not objected either for exclusion or inclusion, accordingly, this is company restored to the list of the comparables.

10.19 Sasken Communication Technologies Ltd. & SIP Technologies & Exports Ltd. : Neither the assessee nor the revenue has raised any specific objections against the inclusion or exclusion of these companies. Accordingly, no specific adjudication is required in respect of these two companies. The order of the CIT (Appeals) is upheld for these two companies.

10.20.1 Tata Elxsi Ltd. (Seg.) : The assessee objected the inclusion of this company in the list of comparables on the ground of R&D filter as well as functional dis-similarity. The CIT (Appeals) has excluded this company on all three grounds of RPT filter as well as functional dis-similarity.

10.20.2 The learned Authorised Representative of the assessee has submitted that this company is engaged in diversified activities including embedded product design services, industrial design and engineering, animation and visual effects, and system integration services. This company is having unique IP portfolio comprising re-usable software components and ready-to- deploy product frameworks. Further this company is engaged in R&D activities resulting in certain IPRs. He has further submitted that the functional comparability of this company has been examined by this Tribunal in assessee's own case for Assessment Year 2006-07. He has relied upon the following decisions :

Cases pertaining to Asst. year : 2007-08	Cases pertaining to other Asstt. years
Systech Integrators India (P.) Ltd. v. ITO [2014] 44 taxmann.com 324 (Bang. - Trib.).	Ariba Technologies India (P.) Ltd. (supra).
	3DPLM Software Solutions Ltd. v. Dy. CIT [2014] 42 taxmann.com 333, (Bang. - Trib.)

10.20.3 On the other hand, the learned Departmental Representative has relied upon the order of the TPO and submitted that the predominant activity of this company is software development services and therefore this company is functionally comparable.

10.20.4 Having considered the rival submissions and relevant material on record, we note that this company is not in the activity of pure software development services but engaged in the diversified product development which includes multi media and Imaging process. Further this company is also engaged in the activities such as hardware design, engineering design and mutual computing. Therefore in view of the diversified activities as mentioned above, we find that this company is not comparable with the software development services provider like assessee. Identical issue has been considered by this Tribunal in assessee's own case for the Assessment Year 2006-07 in paras 17 & 18 as under :

'17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica Pvt. Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:-

"14. As far as comparable at Sl. No. 6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:-

"7.7 Tata Elxsi Limited.:

From the facts and material on record and submissions made by the learned AR, it is seen that the 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 AR 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 fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties."

15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl. No. 6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl. No. 24 viz., Tata Elxsi Ltd. should be rejected as a comparable."

18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO.'

In view of the above facts, we direct the A.O/TPO to exclude this company from the list of comparables.

10.21.1 Thirdware Solutions Ltd. : This company was selected by the TPO and included in the list of comparables for the purpose of computing the ALP. The assessee did not contest inclusion of this company in the list of comparables before the TPO as well as before the CIT (Appeals). However, the CIT(A) excluded the company from the list of comparables. assessee is seeking exclusion of this company from the list of comparables on the ground that this company is functionally dis-similar to the assessee.

10.21.2 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that when the assessee did not raise any objection against the inclusion of this company by the TPO either in the proceedings before the TPO or before the CIT (Appeals), then, without seeking the leave of the Tribunal to raise a new plea/ground, the assessee cannot be permitted to raise this issue in the present appeal. Since there is no finding of the authorities below on the functional comparability of this company as the assessee did not raise any objection, therefore, in the absence of additional ground raised by the assessee and further in the absence of any leave of the Tribunal to raise such ground, this objection of the assessee is rejected. Since this company was excluded by the CIT (Appeals) on the ground of 0% RPT filter. Therefore, in view of our finding on the proper RPT filter at 15%, this company having only 9.9% RPT, is retored to the list of comparables.

10.22.1 Wipro Ltd. : This company was selected by the TPO and included in the list of comparables. The assessee objected the inclusion of this company on the ground of functional dis-similarity. The CIT (Appeals) excluded this company on 0% RPT filter as well as functional dis-similarity.

10.22.2 Before us, the learned Authorised Representative of the assessee submitted that this company cannot be compared with the assessee as it has made significant investment in the business acquisition. He has referred the relevant part of the Annual Report and submitted that this company has reported a huge investment in acquisition of the business. This company is also engaged in the business of innovation, technology innovation, process innovation and delivery innovation. It also earns about 8% of its revenue from innovation activity and also having more than 13 engineering patents, enterprises, business and quality. This company has 55 centres of excellence and 30 innovation products. It has also set up a handset mobile tested lab and engaged in R&D activity. Thus this company cannot be compared with the assessee. He has relied upon the following decision :

Cases pertaining to Asst. year : 2007-08

Systech Integrators India (P.) Ltd. (supra)

10.22.3 On the other hand, learned Departmental Representative has submitted that when the TPO has considered ITES segment of this segment than the other activity of this company are not relevant for determining the ALP. Thus he has submitted that this company is engaged in the similar activities and therefore is a good comparable. He has relied upon the order of the TPO.

10.23.4 We have considered the rival submissions and the relevant material on record. The assessee objected to the inclusion of this company in the list of comparables on the ground that it fails the R&D filter as well as the functional dis-similarity. The CIT (Appeals) excluded this company from the list of comparables as it was found functionally dissimilar to the assessee. There is no dispute that this company is having significant investment in acquiring new business and also engaged in the R&D activities. Therefore this company is having huge brand value as well as bargaining power in comparison to the other companies who are engaged in the software services providing activity. The comparability of this company was also considered by the Hon'ble Delhi High Court in the case of Agnity India Technology Pvt. Ltd. and the Hon'ble High Court while confirming the finding of the Tribunal has observed that since this company is having the brand value and bargaining power, therefore, cannot be compared with the companies which are not having brand value and working only as captive service provider. Thus in view of the fact that this company is having various patents across product engineering, enterprise business and quality, this company cannot be considered as a good comparable of the assessee for the purpose of determining the ALP. Hence we direct the Assessing Officer/TPO to exclude this company from the list of comparables.

10.23.5 Since we have directed the inclusion and exclusion of certain companies from the list of comparables, therefore, the TPO is directed to recompute the ALP on the basis of the remaining comparables and also consider the benefit of tolerance range of +5% to -5% as per the proviso to section 92C.

ITES (Segment)

11. As it has been mentioned in the foregoing paragraphs that the assessee is engaged in providing services to its parent company under two segments i.e. software development services and Information Technology Enabled Services with respect to products of Ariba based on the agreement for software development services and ITES respectively. The assessee operating margin in ITES is 19%. To bench mark its International Transactions in ITES segment the assessee has selected 12 comparables as under :-

Sl. No	Comparable Company	Without Adjs. Mark up on Total Cost (after WC) %
1.	Ace Software Exports Ltd.	- 8.12
2.	Ask Me Info Hubs Ltd.	3.98
3.	C S Software Enterprise Ltd.	15.83
4.	Cosmic Global Ltd.	9.64
5.	Maple Esolutions Ltd.	29.16
6.	Aditya Birla Minacs Worlwide Ltd (Earlier Transworks Information Services Ltd.)	10.32
7.	Triton Corp Ltd.	25.07
8.	Galaxy Commercial Ltd	11.47
9.	C M C Ltd	30.78
10.	DatamaticsSoftworld Pvt. Ltd	3.85
11.	Goldstone Teleservices Ltd	-67.94
12.	National Securities Depository Ltd	29.17
	Mean Margin	7.77%

The assessee has computed the mean margin of these comparables being OP/TC at 7.77% and claimed that the assessee's international transaction is at arm's length having margin of 19%. The TPO rejected the 9 of the comparables selected by the assessee in its Transfer Pricing analysis except the four companies which are at S.Nos.4, 5, 6 & 7 as under :-

Comparable Company	Without Adjs. Mark up on Total Cost (after WC) %
Cosmic Global Ltd.	9.64
Maple Esolutions Ltd.	29.16
Aditya Birla Minacs Worlwide Ltd (Earlier Transworks Information Services Ltd.)	10.32
Triton Corp Ltd.	25.07

Before the TPO/A.O., the assessee has also submitted the additional comparables as under :-

Sl. No.	Comparable Company	Without Adjs. Mark up on Total Cost (after WC) %
1.	Cameo Corporate Services Ltd.	--
2.	Sparsh BPO Services Ltd.	--
3.	Nittany Outsourcing Services Ltd.	--

Out of these additional comparables submitted by the assessee, the TPO accepted the only one namely Nittany Outsourcing Services Pvt. Ltd. The TPO carried out fresh search and selected 27 companies in the set of comparables inclusive of three in the original set of comparables selected by the assessee and one from the additional comparables submitted before the TPO by the assessee. The set of comparables selected by the TPO are as under :-

Sl. No.	Comparable Company Name	OP to Total Cost % as per TP Order	OP to Total Cost % after exclusions of comparables as urged before ITAT
1.	Accentia Technologies Limited	25.43	25.43
2.	Aditya Birla Minacs Worldwide Limited (Transworks Information Services Ltd)	10.37	10.37
3.	AllSec Technologies Limited	24.99	24.99
4.	Apex Knowledge Solutions Limited	12.38	12.38
5.	Apollo Health Street Limited	-22.62	-22.62
6.	Asit C Mehta Financial Services Limited	22.08	22.08
7.	Bodhtree Consulting Ltd. (Seg)	28.86	0.00
8.	Caliber Point Business Solutions Ltd	19.51	0.00
9.	Cosmic Global Ltd (Tulsyan Technologies Ltd)	10.70	10.70
10.	Datamatics Financial Services Limited (Seg)	3.66	3.66
11.	Eclerx Services Ltd.	85.22	0.00
12.	Flextronics Software Systems Limited (Seg)	5.42	0.00
13.	Genesys International Corporation Ltd	7.90	7.90
14.	HCL Comnet	43.28	0.00
15.	ICRA Techno Analytics Ltd (Seg)	10.78	10.78
16.	Informed Technologies Ltd	34.07	0.00
17.	Infosys BPO Ltd	27.90	0.00
18.	IServices India Ltd	47.80	47.80
19.	Maple E Solutions Limited	29.48	29.48
20.	Mold-Tek Technologies Ltd	114.25	0.00
21.	R Systems International limited (Seg)	17.63	17.63
22.	Spanco Limited (Seg)	18.94	18.94
23.	Triton Corp Limited	26.93	26.93
24.	Vishal Information Technologies	41.57	0.00
25.	Wipro Ltd (Seg)	29.42	0.00
26.	Nittany outsourcing Services Pvt Ltd.	9.87	9.87
27.	Accurate Data Converters Ltd	47.37	47.37
Arithmetic Mean Mark up of Comparables after Working Capital Adjustment of 0.24% as determined by the TPO		26.92	17.49
Assessee's Margin			18.66

Thus the TPO has arrived at Arithmetic Mean (AM) of the comparables after working capital adjustment of o.24% at 26.92% in comparison to the assessee's margin taken by the TPO at 18.66%.

12. There is no dispute regarding Most Appropriate Method (MAM) being TNMM and OP/TC as PLI and accordingly the TPO proposed an upward adjustment on account of ALP of Rs. 59,91,335. On appeal, the CIT (Appeals) has excluded 19 comparables out of 27 comparables selected by the TPO. The CIT (Appeals) has applied 0% RPT filter and thereby excluded 18 comparables from the set of comparables. Another comparable being Flextronics Software segment was excluded by the CIT (Appeals) on the ground that this company fails R&D filter which is more than 3.88% of the sale and further this company is engaged in the diversified segment i.e. ;product and services. Thus out of the 19 excluded by the CIT (Appeals) 18 were excluded on the ground of 0% RPT filter.

13. As regards the exclusion of the 18 comparables on the ground of RPT filter, we have already discussed this issue while dealing with software development services segment and therefore in view of our finding that 15% RPT is appropriate in the case of the assessee. The companies which are included in the set of comparables and having upto 15% revenue from RPT are required to be examined on other grounds including functional comparability. The CIT (Appeals) has retained 8 comparables which are as under :-

Sl. No.	Company Name	OP to Total Cost % (before working capital adjustment)	OP to Total Cost % (after working capital adjustment)
1.	Accentia Technologies Ltd. (Seg.)	30.61	25.43
2.	Apex Knowledge Solutions Pvt. Ltd.	12.83	12.38
3.	Bodhtree Consulting Ltd. (Seg.)	29.58	28.86
4.	Cosmic Global Ltd.	12.40	10.70
5.	IServices India Pvt. Ltd.	49.47	47.80
6.	Maple Esolutions Ltd.	34.05	29.48
7.	Triton Corp Ltd.	34.93	26.93
8.	Vishal Information Technologies Ltd.	51,19	41.57

14. Accordingly, the mean margin was reworked by the CIT(A) after capital adjustment at 27.89%. Thus both the assessee as well as the revenue are aggrieved by the order of the CIT (Appeals) and filed cross appeals.

15. We shall deal with each and every comparable which has been challenged by the assessee and exclusion of some of the comparables has been challenged by the revenue one by one as under :

(i) Accentia Technologies Limited : Inclusive of this company is in the list of comparables has not been contested by the assessee either before the TPO or before the CIT (Appeals) or even before this Tribunal. Therefore there is no dispute regarding the comparability of this company for the purpose of ALP. Accordingly, no adjudication is required on this comparable.

(ii) Aditya Birla : This company was part of T.P. analysis of the assessee and also selected by the TPO/A.O. The assessee did not contest the inclusion of this company in the list of comparables. However, the CIT (Appeals) excluded this company on the ground of 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 4.24% of RPT.

(iii) Allsec Technologies Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) and even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 11.90% of RPT.

(iv) Apex Knowledge Solution Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue.

(v) Apollo Health Street Ltd. : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on turnover filter. We find that the RPT revenue of this company is 17.77%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables.

(vi) Asit C Mehta Financial Services Ltd. : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on turnover filter. We find that the RPT revenue of this company is 15.76%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables.

(vii) Bodhtree Consulting Ltd (Seg.) : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparable on the ground that there is extra-ordinary profit as well as extra-ordinary event in this company during the year under consideration. Further, the assessee also contended that the RPT revenue of this company is at 38.54% and therefore this company fails the RPT filter. The CIT (Appeals) retained this company in the list of comparables.

Before us the learned Authorised Representative of the assessee has reiterated its contention and submitted that there is an extra-ordinary profit of this company during the year and further the RPT fails the filter applied by the TPO/A.O as well as CIT (Appeals). He has referred draft order dt.9.12.2010 and submitted that the A.O./TPO has reproduced the particulars regarding RPT which show that during the F.Y. 2006-07, relevant to the assessment year under consideration this company has RPT to the extent of 38.54% of revenue. Thus this company cannot be considered as uncontrolled comparable company.

On the other hand, the learned Departmental Representative has submitted that the TPO/A.O as well as CIT (Appeals) examined the records of this company and did not find the objection raised by the assessee as acceptable. He has relied upon the orders of the authorities below.

We have considered the rival submissions as well as the relevant material on record. As regards the objection of the learned Authorised Representative that this company has reported abnormal profits during the year. We find that high profit margin alone cannot be a ground for inclusion or exclusion of any company / entity in the list of comparables. However, if the high profit margin is due to some abnormal circumstances or event, then, the said company/entity cannot be considered as good comparable due to the reason of abnormal event or circumstances resulting high profit margin. Therefore, in the absence of any abnormal/extraordinary event or circumstances leading to high profit margin this objection of the learned Authorised Representative is not acceptable and hence rejected. Even otherwise, the profit margin at 29.58% cannot be considered as an abnormal when the assessee itself has reported the margin at 19% which is modified to 18.66%. We further note that even in the case of Essential Technologies Ltd. the profit margin before working capital was considered at Rs. 30.61% and the assessee has accepted the said company as a good comparable. Therefore, this objection of the assessee is without any merit or substance and deserves rejection. As regards the RPT at 38.54%, we find that the assessee raised this objection before the TPO/A.O and it has not been specifically dealt with by the authorities below. Further, from the Annual Report of this company, we find that the objection raised by the assessee pertains to the advances given by this company to the Associated Enterpries (AEs) and reported that the same was taken as RPT. The advance to the AEs does not pertain to the ITES segment and further it is not a operational trading activity of the said company to be considered as RPT for the purpose of uncontrolled comparable price. Accordingly, we do not find any merit in the objections of the assessee, even on the ground of RPT.

(viii) Caliber Paint Business Solutions : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparables on the ground that it has 23% revenue from RPT and further this company is engaged in R&D activity and also functionally different. The CIT (Appeals) excluded this company on the ground of 0% RPT filter as this company was stated to have 13.69% RPT.

Before us, the learned Authorised Representative of the assessee has submitted that this company fails the RPT filter of more than 15% as this company has shown/reported 23% RPT. Therefore, this company should be excluded from the list of comparables.

On the other hand, the learned Departmental Representative has submitted that the CIT (Appeals) as well as the TPO/A.O has reported only 13.69% RPT and therefore this company does not fail the filter of 15% RPT.

We have considered the rival submissions as well as the relevant material on record. We note that the TPO/A.O as well as the CIT (Appeals) has mentioned the RPT of this company at 13.69%. therefore the claim of having more than 15% RPT is disputed by the revenue. We further note that the relevant record has not been produced before us to show that the company has earned the revenue of more than 15% from RPT as claimed by the assessee as 23%. In the absence of relevant record, even the issue of functional comparability cannot be decided. Accordingly, in view of the facts and circumstances of the case when the relevant record has not been produced before us in support of the rival claims of the parties the comparability of this company is set aside to the record of the A.O./TPO for considering the objection of the assessee regarding RPT as well as functional dis-similarity on account of R&D activity as well as other functions of this company.

(ix) Caliber Point Business Solutions Ltd. (Seg.) : This company was part of the T.P. analysis of the assessee and also selected by the TPO/A.O. The CIT (Appeals) has also retained this company as a good comparable. The assessee did not object against this company. Accordingly, the comparability of this company is not in dispute before this Tribunal.

(x) Datamatics Financial Services Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A), even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company is restored back to the set of comparables having only 7.88% RPT.

(xi) Eclerx Services Ltd. : This company was included by the TPO in the list of comparable. The assessee objected to this company on the ground of functional dis-similarity. The CIT (Appeals) has excluded this company on the ground of RPT that this company is having only 9.12% RPT. Therefore in view of our finding on RPT filter, the comparability of this company has to be decided on basis of functional similarity or dis-similarity.

The ld. AR submitted that this company is rendering services like engineering, designing services which requires highly skilled employees. Thus, this company cannot be selected as comparable because their functions are different. He has relied upon the decision of Special Bench of Mumbai Tribunal in the case of Maersk Global Centres (India ) (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 83/43 taxmann.com 100 and submitted that this company is rendering highly skilled services and cannot be compared with the service of ITES and accordingly, this company should be deleted from the set of comparables.

On the other hand, the ld. DR has relied upon the orders of authorities below and submitted that the TPO has considered the functional comparability at the time of selecting this company.

We have considered the rival submissions and relevant record. At the out set, we note that the comparability of M/s Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India ) (P.) Ltd. (supra) in para 82 and 83 as under :

"82. In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns.

83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP."

As discussed by the Special Bench in the case of Maersk Global Centres (India) (P.) Ltd. (supra), this company provides data analysis and data process solution and is recognised as experts in chosen market financial services, retail and manufacturing. It was found to have being providing complete business solutions. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the software development services. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables.

(xii) Flextronics Software : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparable as it fails R&D filter and also having ITES segment. The CIT (Appeals) excluded this company by accepting the contention of the assessee on R&D filter as well as ITES segment.

We have heard the learned Departmental Representative as well as learned Authorised Representative. Ld. D R has relied upon the order of the TPO/A.O and submitted that the TPO has examined the the functional similarity of this company. At the outset, we note that the functional comparability of this company has been examined by this Tribunal in a number of decisions. The learned Authorised Representative has relied upon the decision of the Hyderabad Benches of Tribunal Dt.27.11.2013 in case of DE Shaw India Software (P.) Ltd. v. Asstt. CIT [2014] 42 taxmann.com 74 (Hyd. - Trib.) wherein the Tribunal has held in para 27 as under :-

"27. Flextronics Software Ltd. and Thirdware Software Solutions Ltd. : The assessee has objected to these two companies to be treated as comparable mainly on the ground that both these companies are into product development. We find that in case of Intoto Software India Pvtg. Ltd. (supra) the co-ordinate bench of this Tribunal having found that these two companies are functionally different as they are into product development has directed excluding these companies for comparability analysis. Respectfully following the decision of the co-ordinate bench of this Tribunal in case of M/s. Intoto Software India Pvt. Ltd. (supra) we also direct the Assessing Officer / TPO to exclude both these companies."

Thus it is found by the Tribunal in a series of decisions that this company is into product development which is not comparable with the assessee of pure ITES segment. Accordingly, we do not find any error or illegality in the order of the CIT (Appeals) in excluding this company.

(xiii) Genesys International Corporation Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range this company having 5.84% RPT is restored back to the set of comparables.

(xiv) HCL Comnet : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on RPT filter. We find that the RPT revenue of this company is 21.52%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables.

(xv) I C R A Techno Analytics Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range this company having RPT at 1.85% is restored back to the set of comparables.

(xvi) Informed Technologies Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on RPT filter. We find that the RPT revenue of this company is 15.93%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables.

(xvii) Infosys BPO Ltd. : This company was selected by the TPO and included in the list of comparables. The assessee objected against inclusion of this company in the set of comparables before the CIT (Appeals) on the ground of functional dis-similarity. The CIT (Appeals) has excluded this company on the ground of 0% RPT filter.

Before us, the learned Authorised Representative of the assessee has submitted that the assessee had opposed inclusion of this comparable before the TPO on the ground that this company has substantial intangible assets, profits earned predominantly due to brand value and has large focus on R&D apart from substantial selling and marketing expenses. This company has a finance BPO and there is no sub-segment in the ITES segment. The learned Authorised Representative has referred to the Annual Report of this company and submitted that this company has brands and intangibles having diversified operations at large scale. Further this company is engaged in the development of mixed products like Finacle. This company is carrying out a large scale R&D activities and therefore cannot be considered as a good comparable with the assessee. The learned Authorised Representative has relied upon the following decisions :-

CASES PERTAINING TO ASST. YEAR : 2006 - 07	CASES PERTAINING TO OTHER ASSTT. YEARS
Cypress Semiconductor Technology India (P.) Ltd. v. Dy. CIT [2015] 57 taxmann.com 69 (Bang. - Trib.)	Triology E-Business Software India (P.) Ltd. (supra)
Agnity India Technologies (P.) Ltd. (supra)	24/7customer.com v. Dy. CIT [2013] 140 ITD 344/[2012] 28 taxmann.com 258 (Bang.)
Agnity India Technologies (P.) Ltd. (supra)	Adaptec India (P.) Ltd. [IT Appeal No. 1801 (Hyd.) of 2009.
Misys Software Solutions India (P.) Ltd. IT(TP) A No.1425 (Bang.) of 2010 - Turnover	Mercedes Benz R & D India (P.) Ltd. (AY : 2007-08) ITA No. 1222/Bang/2011.
Verisign Services India (P.) Ltd. v. Dy. CIT [2015] 64 taxmann.com 281 (Bang. - Trib.)	CSR India (P.) Ltd. (supra)
Thoughtworks Technologies (India) (P.) Ltd. IT(TP) Appeal No. 1326 (Bang.) of 2010 - Turnover	Witness Systems Software India (P.) Ltd. v. Dy. CIT [2014] 61 SOT 64/[2013] 34 taxmann.com 183 (Bang. - Trib.) (URO)
	FOR CASES INVOLVING JOINT OPERATION, LARGE INTANGIBLES, HIGH BRAND VALUE, RISK BEARING & HIGH PROFIT MARGIN CASES
	Agnity India Technologies (P.) Ltd. (supra)
	Agnity India Technologies (P.) Ltd. (supra)
	NTT Data India Enterprise Application Services (P.) Ltd. v. Asstt. CIT [2013] 40 taxmann.com 173 (Hyd. - Trib.)
	Motorola India Electronics (P.) Ltd. v. ACIT [IT Appeal Nos. 1274 & 1413/Bang/2008].
	Logica (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 374 (Bang. - Trib.)

On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and submitted that when this company is in the business of ITES then it is functionally comparable with that of the assessee. The assessee did not object the inclusion of this company in the list of comparables before the TPO.

We have considered the rival submissions as well as the relevant material on record. The contention of the ld. A.R. of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if-

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Thus it was found that this company is functionally dis-similar to the ITES service provider company as it provides end to end solutions in technical consultancy, design, development, re-engineering, maintenance, system integration and implementation. This company also generates revenue from the software products and has huge intangible assets. In view of the above facts and circumstances as discussed above, this company is functionally not comparable with that of the assessee. Accordingly, we direct the A.O./TPO to exclude this company. A similar view has been taken by the co-ordinate benches of this Tribunal in the cases relied upon by the assessee and cited supra.

(xviii) I Services India Ltd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue.

(xix) Maple ESolutions Ltd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue.

(xx) Mold Tek Technologies Ltd. (Seg.) : This company was selected by the TPO and included in the list of comparables. The assessee objected to the inclusion of this company in the list of comparables before the TPO as well as before the CIT (Appeals) on the ground of functional dissimilarity and super normal growth. The CIT (Appeals) has excluded this company form the list of comparables by applying 0% RPT as well as on functional dissimilarity.

Before us, the learned Authorised Representative of the assessee has submitted that this company is into engineering services being in the nature of producing design, drawings, detailed structure of engineering drawings using 2D and 3D software. These services are high end in nature and cannot be compared with the software development services provided by the assessee. There is also super normal growth of 200% in this segment. In support of his contention, he has relied upon the following decisions :-

CASES PERTAINING TO ASST. YEAR

Market Tools Research (P.) Ltd. v. Asstt. CIT [2014] 150 ITD 296/[2013] 32 taxmann.com 358 (Hyd. - Trib.)

Capital IQ Information Systems (India) (P.) Ltd. (supra)

Knoah Solutions (P.) Ltd. [IT Appeal No.1407 (Hyd.) of 2013

On the other hand, the learned Departmental Representative has submitted that this company is in ITES and the CIT (Appeals) has excluded this company by holding that this company is a KPO and not a BPO. However, mere nomenclature of KPO and BPO cannot be a ground for inclusion or exclusion of a company in this list of comparables without examining the actual functions performed by the company.

We have heard the rival submissions and the relevant material on record. We find that this company is providing highly technical and specialized engineering services. The functional comparability has been examined by the Special Bench of the Tribunal in the case of Maersk Globle Solution (supra) and it was held that this company cannot be compared with an ordinary ITES. The assessee before us is providing only back office support to the parent company. Therefore, Mold-tek Technology is engaged in producing design, drawing and structural engineering drawings of 2D and 3D software cannot be compared with the assessee. Accordingly, we do not find any reason to interfere with the order of the CIT (Appeals) in treating this company functionally different. A similar view has been taken by the co-ordinate bench of this Tribunal in the case relied upon by the assessee.

(xxi) R Systems International Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company having 0.58 % of RPT is restored back to the set of comparables.

(xxii) Spanco Systems Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company having only 5.03% of RPT is restored back to the set of comparables.

(xxiii) Triton Corp Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue.

(xxiv) Vishal Information Technologies Ltd. : This company was selected by the TPO and included in the list of comparables. The assessee objected against the inclusion of this company in the list of comparables on the ground that it fails R&D filter as well as functional dissimilarity. The assessee has also contested the inclusion of this company before the CIT (Appeals). However, the CIT (Appeals) has retained this company in the list of comparables.

Before us, the learned Authorised Representative of the assessee has submitted that this company is functionally dissimilar to the assessee as this company is engaged in providing services by way of outsourcing services to the third party vendors. He has referred the relevant part of the Annual Report and submitted that the job work expenditure is significant which shows that this company is outsourcing the services to third party and therefore this company cannot be considered as a good comparable. The learned Authorised Representative has further pointed out that for the Assessment Year 2006-07, this Tribunal has held that this company cannot be considered as a good comparable. He has also relied upon the decisions as under :

Zavata India (P.) Ltd. v. Dy. CIT [2013] 35 taxmann.com 423 (Hyd. - Trib.)

Capital IQ Information Systems (India) (P.) Ltd. v. Asstt. CIT [2012] 26 taxmannn.com 31/149 ITD 809 (Hyd. - Trib.)

Cognizant Technology Services (P.) Ltd. v. Asstt. CIT [2014] 151 ITD 191/47 taxmann.com 209 (Hyd. - Trib.)

Avineon India (P.) Ltd. v. Dy. CIT [2014] 150 ITD 543/41 taxmann.com 334 (Hyd. - Trib.)

On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that as far as the functions of this company is concerned, it is very much similar to that of the assessee in providing ITES services.

We have heard the rival submissions and the relevant material on record. We find that salary and wages expenditure of this company is very minimal at 2.3% of total revenue which shows that this company outsources the services to third parties. This fact is also reflected in the Annual Report and profit and loss account wherein the job work expenditure is substantial under the head 'Data Entry Charges' and vendor payment. Therefore, there is no dispute as regards the business model of this company is not different from the Assessment Year 2006-07 and 2007-08. Rather the outsourcing service charges are increased during the year to Rs. 13,12,00,000 from Rs. 11,49,00,000 in the earlier year. This Tribunal in the assessee's own case for Assessment Year 2006-07 has held in paras 24 to 25 as under :

"24. We have considered the rival submissions. As far as comparable companies chosen by the TPO at S.No.1,3,6,7 & 8 viz., Maple ESolution Ltd., Datamatics Financial Services Ltd., Vishal Information Technological Services Ltd., Asit C. Mehta Financial Services Ltd., and Gold Stone Infratech Ltd., in the list of comparable companies chosen by the TPO, we find that the Hyderbad Bench of the ITAT in the case of HSBC Electronic Data Processing India Ltd. v. ACIT, ITA No.1624/Hyd/2010 by order darted 28.6.2013 considered comparability of these companies in the case of a company engaged in rendering IT enabled services to its AE similar to that of the Assessee in the present case. The tribunal held that the aforesaid companies are not comparable. The following were the relevant observations of the Tribunal.

8. The first objection is with reference to selection of comparable data by the TPO with reference to the following five companies-

(a) Vishal Information Technologies Ltd.

(b) Goldstone Infratech Ltd.

(d) Maple e-Solutions Ltd.

(e) Nucleus Netsoft & GIS(India) Ltd. (now known as (Asit C. Mehta Financial Services Ltd.)

Vishal Information Technologies Ltd.

9. The assessee's objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee's case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the out-sourcing cost was at 88.64% of the operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Asstt. CIT v. Maersk Global Services Centre (India) (P.) Ltd. [2012] 14 ITR(Trib) 541 (Mum.) the Mumbai Bench of the Tribunal has analysed and rejected this company as comparable for the reason that it has outsourced a considerable portion of it's business and is functionally different. Moreover, it was also submitted that the DRP in the later year of 2008-09 vide its order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technology Ltd.) was not a suitable comparable and needs to be dropped from the final set of comparables. Based on the above submissions, it was submitted that this company cannot be used as a comparable and has to be excluded.

9.1. The learned Departmental Representative, however relied on the orders of the TPO.

9.2. After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee's own case in the later year, as can be seen from the copy of the order placed on record, for assessment year 2008-09. In view of this, we direct the Assessing Officer to exclude this company from the list of comparables.

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14. In view of the foregoing discussion, we agree with the assessee's objection that the above five comparables should be excluded.

25. The facts and circumstances and the Assessment year for which the aforesaid companies were not considered as comparable are identical to the case decided by the Hyderbad Bench of ITAT and that of the case of the Assessee. Respectfully following the decision of the Hyderbad Bench of ITAT, we direct the TPO to exclude the aforesaid companies from the list of comparable while arriving at the arithmetic mean of comparable. The relevant grounds of appeal of the Assessee are allowed."

In view of the above facts as well as the decision of the Tribunal in assessee's own case for Assessment Year 2006-07, we direct the A.O/TPO to exclude this company form the list of comparables.

(xxv) Wipro Limited (Seg.) : This company was selected by the TPO and included in the list of comparables. The assessee objected the inclusion of this company on the ground of functional dis-similarity. The CIT (Appeals) excluded this company on 0% RPT filter as well as functional dis-similarity.

Before us, the learned Authorised Representative of the assessee submitted that this company cannot be compared with the assessee as it has made significant investment in the business acquisition. He has referred the relevant part of the Annual Report and submitted that this company has reported a huge investment in acquisition of the business. This company is also engaged in the business of innovation, technology innovation, process innovation and delivery innovation. It also earns about 8% from innovation activity and also having more than 13 engineering patents, enterprises, business and quality. This company has 55 centres of excellence and 30 innovation products. It has also set up a handset mobile tested lab and engaged in R&D activity. Thus this company cannot be compared with the assessee. He has relied upon the following decisions :

Market Tools Research (P.) Ltd. (supra)

Intoto Software India (P.) Ltd. v. Asstt. CIT [2014] 146 ITD 360/[2013] 35 taxmann.com 421 (Hyd. - Trib.)

On the other hand, learned Departmental Representative has submitted that when the TPO has considered ITES segment of this company than the other activity of this company are not relevant for determining the ALP. Thus he has submitted that this company is engaged in the similar activities and therefore is a good comparable. He has relied upon the order of the TPO.

We have considered the rival submissions and the relevant material on record. Though the TPO has considered only segmental data relating to ITES services, however, there is no denial that this company is having significant investment in the business acquisition as well as engaged in the innovation activities of various fields including technology innovation, process innovation and delivery innovation. This company is also having a huge brand value and therefore has a bargaining power in comparison to the other companies who were engaged in the back office support services. This company is also maintaining 55 centres of excellence and 30 innovation projects. Therefore this company is also engaged in the R&D activities and getting the benefit of the innovation and R&D. In view of the above facts, this company cannot be treated as a good comparable for the assessee which is providing back office support services to its parent company without earning any benefit of the innovation and R&D. Accordingly, we do not find any reason to interfere with the finding of the CIT (Appeals) on functional dis-similarity of this company.

(xxvi) Nittany Outsourcing Services Pvt. Ltd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue.

(xxvii) Accurate Data Converters Ltd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of this company either by the assessee or by the revenue.

16. Since we have directed the TPO to exclude some of the companies from the list of comparables as well as restored some of the companies to the list of comparables which were excluded by the CIT (Appeals), therefore, the TPO/A.O. is directed to recompute the ALP after exclusion and inclusion of the comparable companies as directed above. Needless to say the benefit of tolerance range of +/- 5% as per the proviso to section 92C be considered.

17. In the result, both the appeals of revenue and assessee are partly allowed.

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