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TIBCO Software (India) Pvt. Ltd. Versus Dy. Commissioner of Income Tax

Transfer Pricing adjustment - whether international transaction of provision of software development services of the Appellant does not satisfy the aim's length principle envisaged under the Income-tax Act, 1961? - selection of comparable - Held that:- It quite clear that the activities on account of the Infrastructure Management Services and E-learning and Digital Consulting which constitute 17% and 35% respectively of the total revenue are obviously IT enabled services and are not akin to .....

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CS Software Solutions Ltd. from the final set of comparables.

KALS Information Systems Ltd.(Application Software Segment) be excluded from the final set of comparables as the said company was developing software products and was not purely/ mainly a software development service provider.

E-infochips Ltd.cannot be excluded from the final set of comparables on the ground that the instant assessment year is an "exceptional year of business". It would not be appropriate to co .....

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the show-cause notice issued by him in the course of Transfer Pricing proceedings show that no opportunity was allowed to the assessee before applying the turnover filter - we therefore remand the matter back to the file of the Assessing Officer/TPO for consideration afresh.

Sasken Communications Technologies Ltd. n the application of the turnover filter, we have already set-aside the matter back to the file of the TPO while considering the Ground of Appeal No.4.6 of the assessee in t .....

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nsite services whereas assessee was providing services to his clients as an offsite service provider.

Helios and Matheson Ltd. the financial data available in public domain does not conform to the financial year in which the international transactions in question have been carried out by the assessee. Therefore, the TPO justifiably excluded the said concern from the final set of comparables, which we hereby affirm.

Bodhtree Consulting Ltd. margins of the said concern for th .....

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ondent : Mr. Sandeep Garg, CIT ORDER PER G. S. Pannu, AMPER G. S. PANNU, AM The captioned appeal has been preferred by the assessee pertaining to the assessment year 2009-10, which is directed against the order of the Dy. Commissioner of Income Tax, Circle 1(2), Pune (in short 'the Assessing Officer') passed u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 (in short "the Act") dated 10.12.2013, which is in conformity with the directions given by the Dispute Resolution Pane .....

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ing that the international transaction of provision of software development services of the Appellant does not satisfy the aim's length principle envisaged under the Income-tax Act, 1961 ('the Act'). Ground No.2: Erroneous treatment of Foreign Exchange gain/loss • The Ld. AO/Ld. Transfer Pricing Officer ('Ld.TPO') erred in considering foreign exchange loss/gain as operating cost/income while computing the operating margins of the comparables for computation of the arm .....

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in-principle" agreed to the objection of the Appellant that foreign exchange gain/loss should be considered as non-operating items while computing the operating margins. Ground No.3: Error in not giving effect to the DRP directions in respect of conducting working capital adjustment to operating margin of Goldstone Technologies Ltd. ('Goldstone'). The Ld. AO erred in computing the transfer pricing adjustment without giving effect to the DRP directions which specifically directed the .....

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of software development services. In doing so, Hon'ble DRP/Ld.AO/Ld.TPO specifically erred in: 4.1. considering and retaining the functionally incomparable FCS Software Solutions Limited ('FCS') as comparable, despite the fact that the Appellant had demonstrated that FCS is: • engaged in non comparable service activities, i.e. IT enabled service activities whereas the transfer pricing adjustment is to the software development services segment of the Appellant; and • a " .....

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able to the functional and asset profile of the Appellant; • has reported erroneous segmental financial information in its Annual Report, which was considered by the Ld. TPO; and • has been rejected by the jurisdictional Pune Bench of the Hon'ble ITAT in the case of PTC Software (India) Ltd. [ITA No.1605/PN/2011 (AY 2007-08) and ITA No.1346/PN/2010 (AY 2006-07)] and Bindview (India) Pvt. Ltd. (ITA No.1386/PN/2010) on account of similar reasons; 4.3. rejecting the functionally compa .....

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for FY 2009-010 had all the financial details pertaining to FY 2008-09; 4.5. rejecting the functionally comparable Software Services Segment of Sasken Communications Ltd., on the erroneous basis of business restructuring of its non comparable segment; 4.6. rejecting the following functionally comparable companies by applying the turnover filter of ₹ 2 to ₹ 200 crores, without giving any opportunity to the Appellant, of being heard: • Persistent Systems Ltd., • IT Services .....

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unt of the quantum of onsite revenues, however simply ignoring the fact that the Appellant is also required to render services on an onsite basis: • Akshay Software Technologies Ltd., • Zylog Systems Ltd., and • Thinksoft Global Services Ltd.; and 4.9. rejecting the functionally comparable Helios and Matheson Ltd. on the erroneous basis that the annual accounts cover the period of 18 months whereas the comparable data should be for 12 months for reliable comparability. Ground No.5 .....

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to appreciate that the Appellant is a routine captive service provider as against the selected comparable companies, which include entrepreneurial companies and hence an adjustment is necessary; and • Disregarding the provisions of Rule 10B(1)(e)(iii), 10B(2) and 10B(3) read with Rule 10C of the Income-tax Rules, 1962 ('the Rules'). Ground No.6: Not allowing the use of multiple year data Hon'ble DRP/Ld.AO erred in not allowing the use of multiple year data as prescribed under R .....

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in ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits derived from the software development services and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions. The above grounds are without prejudice to each other. Your Appellant craves leave to add, amend, alter, modify and/or substitute, and to withdraw the above grounds of appeal." 3. In this appea .....

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gaged in providing software research and development services to TIBCO US as per the design, production orders, plans, process specification and production schedules provided by the TIBCO US. The unit of the assessee is registered as a 100% Export Oriented Unit (EOU) under the Software Technology Park of India (STPI) scheme and the profits therefrom are eligible for the benefits of section 10A of the Act. The assessee company was found to have entered into three types of international transactio .....

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aring an income of ₹ 85,91,335/- which, inter- alia, contained the aforestated international transactions entered with associated enterprises i.e. TIBCO US. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for determining the arm's length price of the international transactions for the purposes of computing income from such transactions in terms of section 92(1) of the Act. The TPO has passed an order u/a 92CA(3) of the Act dated 29.01 .....

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; and, (ii) Payment of interest on external commercial borrowings are concerned, the TPO has accepted the stand of the assessee that the stated values of such transactions are at an arm's length price. On the basis of the arm's length price determined by the TPO, Assessing Officer has passed an order u/s 143(3) r.w.s 144C(1) of the Act dated 10.12.2013 determining the total income of the assessee in conformity with the arm's length price so determined by the TPO as mandated by sectio .....

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ith respect to the addition of ₹ 3,61,96,655/- made to the returned income on account of the determination of arm's length price. 5. At the time of hearing, it was a common point between the parties that the substantive issues in this year, which arise from the order of the TPO dated 29.01.2013 (supra) are primarily similar to those considered by the Tribunal in the assessee's own case for the immediately preceding assessment year 2008-09 vide ITA No.2536/PN/2012 dated 11.02.2015. .....

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% with the arithmetic mean of the margins of the comparable cases selected at 11.73%; and, as assessee's PLI was found to be higher than the arithmetic mean of the margins of the comparable cases, it was canvassed by the assessee that the stated value of the international transactions of Provision of software design and development services was at an arm's length price. The TPO has not disputed the adoption of TNM Method as the most appropriate method and he has also not differed with th .....

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data of the comparable concerns for the contemporaneous period i.e. for the financial year ending on 31.03.2009 for the purposes of the comparability analysis. Though assessee has contested the aforesaid action of the TPO by way of abovestated Ground of Appeal No.6 but at the time of hearing the said Ground of Appeal has not pressed and is accordingly dismissed. 6. Nevertheless in the course of Transfer Pricing proceedings, assessee was show-caused on this aspect and on the basis of the revised .....

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. L G S Global Ltd. 20.50 14.76 5. Goldstone 3.94 3.94 30.07 7. On the basis of the above, the TPO adopted the arithmetic mean of the PLI of the comparables at 31.21% (i.e. after working capital adjustment) and compared it with assessee's PLI of 18.72% and accordingly an adjustment of ₹ 3,61,96,655/- has been made to the stated value of the international transactions in order to determine the arm's length price. 8. The aforesaid approach of the TPO is quite pari-materia to the appr .....

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the said Grounds of Appeal do not require any adjudication. In this background, in so far as the Ground of Appeal Nos.2 and 3 are concerned, they are dismissed as infructuous. 11. The specific arguments put-forth before us at the time of hearing are manifested by the Ground of Appeal No.4 which relates to assessee's stand that the income-tax authorities have erred in accepting certain comparables and/or in rejecting certain comparables while benchmarking the international transactions relat .....

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he assessee is for excluding FCS Software Solutions Ltd. from the final set of comparables. On this aspect, the point made out by the assessee is that the said concern is functionally different from the assessee inasmuch as the majority of services rendered by it are in the category of IT enabled services and therefore it is not to comparable to assessee's activity of providing software design and development services to the associated enterprises. The Ld. Representative for the assessee has .....

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ue and therefore it was excludible from the list of comparables. The Ld. Representative pointed out that the Tribunal in the assessee's own case for assessment year 2008-09 vide its order dated 11.02.2015 (supra) has excluded the said concern from the final set of comparables. It has also been pointed out that for assessment year 2010-11 in assessee's own case the said concern has been excluded from the final set of comparables as per the order of the DRP, a copy of which has been placed .....

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(supra) wherein the following discussion is relevant :- "23. We have carefully considered the rival submissions. In fact, the TPO has reproduced in para 15.7 the written submissions of the assessee on this aspect. The first plea raised by the assessee was that income earned by the said concern from rendering of application support services and infrastructure management services, which constitute 11% and 15% respectively of the total revenue, are in the nature of IT enabled services and not .....

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y the TPO in response to assessee's aforesaid assertions, there is no denial to the same. Though the TPO goes on to rely on the CBDT's Circular dated 26.09.2000 (supra), but that is in relation to the activity of E-learning and Digital Consulting being carried out by the assessee. The segment of E-learning and Digital Consulting is a different segment. In any case, assessee's plea based on the nature of services on account of application support services segment and infrastructure ma .....

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t it is in the nature of IT enabled services:- "E-learning and Digital Consulting Services: US corporations look at E-learning of web / CD based training programs as one of the ways to achieve organizational growth and improved business performance. E-learning helps employees, vendors, and dealers of a company to better their performance and deal with fast-changing environments. E-learning makes training highly efficient, by making it available anytime, anywhere and reduces total cost of tr .....

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software development services, as asserted by the assessee. Once the segment of application support and infrastructure management services are removed along with the exclusion of E-learning and Digital consulting segment, then the income of the said concern from software development services falls below 75% of its total income and therefore, it deserves to be excluded even on the basis of the filter applied by the TPO. Thus, on this aspect, assessee succeeds." 15. Ostensibly, the Tribunal h .....

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he aforesaid, it is noticed that the proportionate income of the said concern in various segments is as under :- IT consulting 48%; Infrastructure Management Services 17%; and, E-learning and Digital Consulting 35%. 16. On the basis of the aforesaid, it quite clear that the activities on account of the Infrastructure Management Services and E-learning and Digital Consulting which constitute 17% and 35% respectively of the total revenue are obviously IT enabled services and are not akin to the so .....

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tware Solutions Ltd. from the final set of comparables. This on Ground of Appeal No.4.1 assessee succeeds. 17. By way of Ground of Appeal No.4.2, the plea of the assessee is for exclusion of M/s KALS Information Systems Ltd. (Application Software Segment) from the final set of comparables. On this aspect, the primary plea of the assessee is that the said concern is functionally different from the activities undertaken by the assessee in its segment of Provision of software design and development .....

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common point between the parties that so far as the KALS Information Systems Ltd. (Application Software Segment) is concerned, the said concern was found to be incomparable by the Tribunal in its order dated 11.02.2015 (supra) in assessee's own case for assessment year 2008-09 on the ground that it was functionally different. It was also a common point between the parties that the facts and circumstances in this year remain the same and therefore in view of the precedent in the assessee' .....

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wn case for assessment year 2008-09 dated 11.02.2015 (supra) is relevant :- "10. The first plea of the assessee is with respect to M/s Kals Information System, (applications software segment), a concern which has been included as a comparable by the TPO for the purposes of comparability analysis. According to the assessee, the inclusion of said concern as a comparable is wrong because the said concern is functionally different from the activities undertaken by the assessee in its segment of .....

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n as an element of inventory, which according to the assessee demonstrated that the said concern was a product company and not a software services company. It was also pointed out on the basis of the website of the said concern that it was owning software products like Virtual Insure, Ia vision, CMSS, Docuflo (Document Management System) to support its plea that the said concern was into development and sale of software products. It was also pointed out before the TPO that the said concern was a .....

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evelopment service provider to call their 'services' as 'product', thus such companies continue to be service providers. The DRP has also affirmed the stand of the TPO, against which assessee is in appeal before us. 11. On this aspect, the learned counsel for the assessee has reiterated the submissions put-forth before the lower authorities by pointing out that the applications software segment of the said concern was into development and sale of software products, which is an ac .....

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the case of Bindview India P. Ltd. vide ITA No.1386/PN/2010 order dated 30.11.2011, wherein it has been held that the said concern was functionally different from a software development service provider. A reference has also been made to the decision of the Bangalore Bench of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. vide ITA No.1054/Bang/2011 order dated 23.11.2012, wherein also said concern was held to be not comparable to a software development service provider. .....

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nication dated 13.01.2009 addressed to the Addl.CIT (TP), Hyderabad confirmed that its core business was that of software development service provider. Further, according to the learned CIT-DR even the error in the segmental reporting by the said concern would not alter the bigger picture that it was deriving income mainly from software development service. Accordingly, inclusion of the said concern in the final set of comparables is sought to be defended. 13. We have carefully considered the ri .....

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upplied by the associated enterprise. Assessee is remunerated on a cost plus markup (15%) basis for the services provided to the associated enterprise. Notably, the ownership of the product developed lies with the associated enterprise. The ownership of any documentation or know-how and any other proprietary information received from the associated enterprise for the purpose of rendering of services to the associated enterprise are also the property of the associated enterprise. Even any improve .....

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this connection, the Bangalore Bench of the Tribunal in the case of Trilogy E-Business Software India P. Ltd. (supra) held that the said company was developing software products and was not purely/ mainly a software development service provider. Accordingly, the Bangalore Bench of the Tribunal held that the said concern was not comparable to the assessee before them, which was undertaking activities similar to the case before us, namely, software development services. In-fact, the Pune Bench of .....

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that the said concern is engaged in development and sale of software product, etc., which is distinct from the software development services rendered by the assessee to its associated enterprise. Thus, we are inclined to uphold the plea of the assessee that the M/s Kals Information System Ltd. (applications software segment) is functionally incomparable to the assessee. 15. The attempt by the learned CIT-DR to support the stand of the TPO on the basis of a communication received by Addl.CIT (TP) .....

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hold the plea of the assessee for exclusion of M/s Kals Information System Ltd. (applications software segment) from the final set of comparables for the purposes of comparability analysis." 21. Following the aforesaid precedent, we direct the income-tax authorities to exclude M/s KALS Information Systems Ltd. (Application Software Segment) from the final set of comparables. Thus, on Ground of Appeal No.4.2 assessee succeeds. 22. Now, we may consider the Ground of Appeal No.4.3 whereby asse .....

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17 66.58% 2 2007-08 24.03 17.1 6.93 40.52% 3 2008-09 14.87 14.18 0.69 4.87% 4 2009-10 13.29 9.13 4.16 45.56% 5 2010-11 26.04 15 11.04 73.60% 23. On this aspect, the Ld. Representative for the assessee pointed out that the said concern has been excluded on an erroneous reasoning that the year under consideration was an exceptional year. In this context, it was pointed out that in assessment year 2008-09, the said concern has been accepted as a good comparable by the TPO himself. The Ld. Represent .....

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le. In this context, the Ld. Representative has referred to pages 554 to 564 of the Paper Book wherein is placed a copy of the Annual Report of the said concern to point out that the only reason attributed for the decline in the margin is purported to be the slow- down in the US economy. The Ld. Representative pointed out that the said reason is applicable all across and the same applies even to the operations of the assessee, which is rendering comparable services to its associated enterprises .....

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his year to ₹ 13,30,60,610/- from ₹ 21,03,37,967/- in the immediately preceding year. It has also been pointed out that in this year the said concern has earned an exceptional income by way of sale of units of ₹ 2,90,57,578/- as against a meager income of ₹ 93,31,270/- on this count in the immediately preceding year. It was therefore contended that based on the financial results of the said concern for the instant assessment year, the said concern has not carried out its .....

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g assessment years show that in the present year the PBIT/Cost has dropped to 4.87% which is quite low in comparison to the other years. Nevertheless, the factum of lower margin in this year by itself cannot be a ground to decide whether such concern is to be excluded or included in the final set of comparables. The aforesaid aspect should only be a trigger which would justify further investigation to establish whether the said concern is to be taken as a comparable was not. The investigations a .....

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rability analysis or that it is not a normal business condition then we are of the view that the said concern should not be included in the list of comparables for the purposes of determining the arm's length price of the international transactions. Otherwise, the entity which satisfies the comparability analysis even if it has a low margin which is reflective of a normal business condition, should not be rejected solely on the basis of that there is a dip in the profit margin in comparison .....

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ch environment, and is not specific to E-infochips Ltd.. Therefore, in our view, the TPO has not demonstrated that the lower profit margin of the said concern in this year is attributable to any abnormal business condition which is far removed from the normal business conditions so as to justify its exclusion on the basis of 'exceptional year'. In-fact, the fall in profit margin is attributable to a generic reason, which is applicable to all the industry players and is not specific to th .....

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siness of the profile of the said concern during the year in comparison to preceding assessment year except fall in profit margin. 26. In so far as the plea raised by the Ld. CIT-DR based on the Annual Report is concerned, in our view, it would not be appropriate to compare each and every single item of income and expense in the financial statements in order to measure its comparability. Moreover, we find that for assessment year 2010-11 also, the said concern has been found to a good comparable .....

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dismissed. 28. In so far as the Ground of Appeal No.4.6 is concerned, the same relates to the plea of the assessee for including the following concerns in the final set of comparables : (i) Persistent Systems Ltd.; (ii) IT Services Segment of Mindtree Ltd.; and, (iii) Larsen and Toubro Infotech Ltd., which have been excluded by the TPO on the basis of turnover filter. On this aspect, the pertinent plea raised by the assessee is that the TPO applied a turnover filter of excluding concerns with t .....

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ilar situation had arisen in the assessee's own case for assessment year 2008-09 wherein also the TPO had not show- caused the assessee before applying the turnover filter of ₹ 200 crores and excluding certain concerns from the final set of comparables; and, the Tribunal in its order dated 11.02.2015 (supra) has set-aside the impugned matter back to the file of the Assessing Officer/TPO for consideration afresh. It was therefore contended that the assessee would be satisfied if the mat .....

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r Pricing proceedings show that no opportunity was allowed to the assessee before applying the turnover filter. Similar situation has been dealt with by the Tribunal in the assessee's own case for the assessment year 2008-09 vide order dated 11.02.2015 (supra) in the following manner :- "46. We have carefully considered the rival submissions on the above aspect. It is quite evident that at the level of TPO, no opportunity was allowed to the assessee before excluding the aforesaid four c .....

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lf in assessment year 2010-11, as asserted by the assessee before us. In our considered opinion, such an approach impinges on the principles of natural justice and the assessee is rightfully aggrieved. In so far as the opportunity of raising objections before the DRP is concerned, in our view, the same cannot take the place of an opportunity that was required to be allowed before the TPO; that the assessee had an opportunity before the DRP is of no consequence for it is the fairness and reasonab .....

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h as the assessment order was required to be made only after the assessee had been allowed a reasonable opportunity of being heard. Considered in the aforesaid light, in the present case it is axiomatic that so far as the issue of the adoption of Turnover filter of ₹ 200 crores to exclude the aforesaid four concerns in concerned, the same has been adopted by the TPO without giving the assessee any opportunity of being heard and therefore in our view the matter ought to be remanded back to .....

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TPO in excluding Sasken Communications Technologies Ltd. from the final set of comparables. As per the discussion in para 11(viii) of the order of the TPO, it is noticed that the said concern has been excluded on the ground that during the year under consideration it has undertaken business restructuring. The Ld. Representative also pointed out that in the show-cause notice dated 31.10.2012 issued by the TPO another reason has been advanced which is to the effect that the said concern fails the .....

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(iv) Automotive, Utilities and Industrial. The Ld. Representative pointed out that it is only the Telecom Software Services Segment of the said concern which is comparable to the Provision of software design and development services being undertaken by the assessee for its associated enterprises. It was pointed out that so far as the business restructuring referred by the TPO is concerned, it relates to the segment at item (ii) i.e. Telecom Software Products whereas the segment comparable to th .....

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ute. With regard to the export turnover filter of the 75% of the total turnover the Ld. Representative pointed out that before the TPO assessee had demonstrated that the export earnings of the said concern were otherwise 95% of the total turnover. 34. On the other hand, the Ld. CIT-DR appearing for the Revenue has not contested the factual matrix brought out by the Ld. Representative for the assessee but has relied upon the discussion in the order of the TPO, which we have already adverted to in .....

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e is stated to be comparable to assessee's activity of Provision of software design and development services to associated enterprises. Therefore, in our view, the reason advanced by the TPO to exclude the said concern is not sustainable. 36. On this aspect, assessee submitted that the turnover of Telecom Software Segment of the said concern is in excess of ₹ 200 crores and therefore if the criteria adopted by the TPO is to be applied, the said concern would be excludible. On the appli .....

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in Ground of Appeal No.4.6. Thus, on this aspect also assessee succeeds for statistical purposes. 37. By way of Ground of Appeal No.4.7, the plea of the assessee is for inclusion of RS Software India Ltd. in the final set of comparables. The TPO has excluded the said concern from the final set of comparables on the basis of the stand of the DRP in the assessee's own case for earlier assessment year 2008-09. 38. On this aspect, it was a common point between the parties that in assessment yea .....

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uding RS Software India Ltd. from the final set of comparables. Thus, on this aspect assessee fails. 39. By way of Ground of Appeal No.4.8, the plea of the assessee is against the action of the TPO in excluding (i) Akshay Software Technologies Ltd.; (ii) Thinksoft Global Services Ltd.; and, (iii) Zylog Systems Limited from the final set of comparables on the ground that the said concerns were predominantly engaged in providing onsite services whereas assessee was providing services to his client .....

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re Technologies Limited from the final set of comparables. The TPO has discussed the aspect of exclusion of Akshy Software Technologies Limited from the final set of comparables in para 15.1 of his order. As per the TPO, Akshy Software Technologies Limited is predominantly an on-site service provider whereby the said concern renders services at the clients site which is outside India, whereas, the assessee is rendering services to the clients as an off-shore service provider. According to the TP .....

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mix of on-site and off-site activities are business exigencies and that such a factor cannot be considered as a filter for evaluating exclusion or inclusion of a comparable concern. The learned representative for the assessee referred to the written submissions made before the DRP, wherein it was contended that assessee's agreement with associated enterprise, does not restrict provision of on-site services and that even if assessee would have provided on-site services to its associated enter .....

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of services. 40. We have carefully considered the rival submissions. Factually speaking, Akshy Software Technologies Limited was found by the TPO to be predominantly engaged in rendering services to its client's on on-site basis. As per the TPO, Akshy Software Technologies Limited rendered services at client's site unlike the services being provided by the assessee through off- shore sites. The difference in operating mechanism of two business models is starkly evident. While under the .....

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on Indian software industry competitiveness to say that because of the differences in costs between a developed country and India, it acts as motivator for the companies located in developed countries to increase its off-shore sourcing of services. In our considered opinion, whether on-site business model provides higher or lower margins in comparison with off-shore development work, is not the issue of consideration. The important point is that the business models are quite different. Ostensibl .....

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not rule out provision of on-site services does not distract from the fact that the tested transactions undertaken by the assessee involve off-shore rendering of services, which is incomparable to the on-site services being rendered by Akshy Software Technologies Limited to its clients abroad. 41. Before parting on this issue, we may also make a reference to the decision of Hyderabad Bench of the Tribunal in the case of DCIT Vs. M/s. Hellosoft India Pvt. Ltd. (ITA No.645/Hyd/2009, for assessment .....

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eover, it is also a fact that part of the employee cost is included by many companies under different other heads. Selection of comparables applying the 'onsite income' filter also stands on the same footing as relevant data / information are not available in respect of all the companies in the database. It is also a fact that though the TPO has himself not applied this filter by observing that the companies having onsite income or more than 75% cannot be treated as comparables but two o .....

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own in case of Mentor Graphics (India) Pvt. Ltd. Vs. DCIT (109 ITD 101) and Philips Software (119 TTJ 721). In aforesaid view of the matter, the companies selected by the CIT(A) as comparables is rational and appropriate in the facts of the present case. We therefore uphold the order of the CIT(A) in directing the Assessing Officer to compute the arithmetic mean of 11 comparables selected by him and determine the ALP after computing the adjusted average PLI. As result, grounds Nos.1,2 and 3 are .....

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estion. The aforesaid decision of the CIT(A) was affirmed by the Tribunal and it is quite clear that there is no discussion as to whether or not such a filter is a relevant criteria to undertake comparability analysis. In the present case before us, it is not the case of the assessee that the application of on-site income criteria applied by the TPO can be defeated on the ground that the relevant information is not available. Therefore, in the present case, we have decided the issue on its own m .....

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resaid precedent in the assessee's own case for assessment year 2008-09 (supra), we hereby affirm the action of the TPO in excluding (i) Akshay Software Technologies Ltd.; (ii) Thinksoft Global Services Ltd.; and, (iii) Zylog Systems Limited from the final set of comparables. Thus, on this aspect assessee fails. 42. By way of Ground of Appeal No.4.9, assessee has assailed the action of the TPO in excluding Helios and Matheson Ltd. from the final set of comparables. The TPO has excluded the s .....

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ises of a period of 18 months. In this factual background, we find no error in the approach of the TPO in excluding the said concern from the list of comparables because the financial data of the said concern available in public domain does not correspond to the financial year of the assessee under consideration. Ostensibly, rule 10B(4) of the Income Tax Rules, 1962 (in short "the Rules") provide that the data to be used in analyzing the comparability of an uncontrolled transaction wit .....

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firm. Thus, assessee fails on Ground of Appeal No.4.9. 44. Before parting, we may also deal with an Additional plea raised by the assessee seeking exclusion of Bodhtree Consulting Ltd. from the final set of comparables. According to the Ld. Representative for the assessee, the said concern is liable to be excluded as it has abnormal trends in its profitability for the year under consideration. According to the Ld. Representative for the assessee, the said concern is an abnormally high profit mak .....

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cant risks as compared to comparables which are full risk bearing entities. Therefore, a concern which has abnormally high level of profits or which witnesses wide fluctuations in profit margins over a period of time should be excluded from the final set of comparables. In- particular, reliance has been placed on the decision of the Bangalore Bench of the Tribunal in the case of M/s Mindteck (India) Ltd. vs. DCIT vide IT(TP)A No.70/Bang/2014 dated 21.08.2014 wherein, under similar circumstances, .....

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by the Pune Bench of the Tribunal in the case of Q Logic (India) Pvt. Ltd. vs. DCIT vide ITA No.227/PN/2014 dated 21.10.2014 and also in the case of PTC Software (India) Pvt. Ltd. vs. DCIT vide ITA No.336/PN/2014 dated 31.10.2014. 45. The Ld. CIT-DR appearing for the Revenue vehemently pointed out that the said concern has been considered as a comparable by the assessee in the Transfer Pricing Study itself and therefore there was no justification for the assessee to seek its exclusion at this s .....

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wer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in .....

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s condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin." 47. In terms of the aforesaid discussion by the Special Bench, it is clear .....

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s would be required to be considered. In this background of the matter, assessee has furnished before us the operating margin trends of the said concern over six financial years i.e. for three preceding years, current year and the two succeeding financial years. On the basis of aforesaid tabulation, it is sought to be pointed out that there exists wide fluctuation in profit margins which ostensibly does not reflect a normal business phenomenon. We find that the Bangalore Bench of the Tribunal in .....

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occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities w .....

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d counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final lis .....

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. (supra) noted that the revenue recognition method followed by the said concern was, the reason for the drastic variation in profit margins of Botdtree Consulting Ltd., and thus upheld its exclusion from the final set of comparables. 49. However, the plea raised by the Ld. CIT-DR is that the said concern was initially included by the assessee in its Transfer Pricing Study as a comparable and therefore assessee cannot seek its exclusion at this stage. This aspect of the controversy has been cons .....

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es which had off-set the wide fluctuations. However, the TPO has dis-agreed with the assessee on the adoption of multiple year's financial data of the comparables and instead, he has carried out the comparability analysis after adopting single year data of the comparables relatable to the period under consideration. It has also been submitted that the Chandigarh special Bench of the Tribunal in the case of DCIT vs. Quark Systems Private Ltd. (ITA No.100, 105/Chd/2009) (Chd) has held that if .....

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osition. In other words, it would be imperative for the assessee to justify exclusion of a concern from the list of comparables if in the initial Transfer Pricing Study undertaken by it, such a concern has been adopted as a comparable. In the present situation, case has been set up by the assessee for exclusion of Bodhtree Consulting Ltd on the ground that the profit margins of the said concern are fluctuating widely and are abnormally high for the period under consideration. Ostensibly, the fin .....

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