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2016 (6) TMI 91 - ITAT BANGALORE

2016 (6) TMI 91 - ITAT BANGALORE - TMI - Computation of deduction u/s.10A - deduction of travelling expenses in foreign currency and certain other expenses - Held that:- In view of Explanation 2(iv) to Section 10A of the Act, which defines 'export turnover', we are unable to accede to the contention of the Ld. AR that travelling expenditure had to be included in the export turnover for computation of deduction u/s.10A of the Act. However in so far as the claim that amounts which were excluded fr .....

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fore granting deduction u/s.10A of the Act - Held that:- Hon'ble jurisdictional High Court in the case of Yokogawa India Ltd (2011 (8) TMI 845 - Karnataka High Court ) had held that profits eligible for relief u/s.10A of the Act was to be excluded from the total income before giving effect to set off mandated u/s.70 of the Act. . Accordingly, we hold that the claim of deduction u/s.10A of the Act has to be calculated without setting off the loss incurred by the assessee in its non- STP units - D .....

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nies were considered by the Tribunal in assessee's own case for A. Y. 2006-07 were directed for exclusion, due to functional incompatibility. Accordingly we direct exclusion of the above companies from the list of comparables. TPO is directed to rework the PLI of the comparables after excluding the above companies and considering the working capital adjustment and proceed in accordance with law - I.T(TP).A No.1550/Bang/2012 - Dated:- 29-4-2016 - SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHR .....

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#8377; 3,11,787/- from its export turnover while computing the deduction available to it u/s.10A of the Income-tax Act, 1961 ('the Act' in short). 3. Ld. Counsel for the assessee submitted that the travelling expenses were not attributable to export of services outside India and ought not have been deducted from export turnover. As per the Ld. AR even if it had to be so excluded, reduction of equal amount had to be given from the total turnover also in view of the judgment of Hon'ble .....

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r as the claim that amounts which were excluded from export turnover has to be deducted from total turnover as well, we are inclined to agree in view of the law laid down by the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd (supra). Accordingly, we direct that such amounts which were excluded from export turnover be excluded from total turnover also while computing the deduction allowable u/s.10A of the Act. Grounds 2 to 6 of the assessee are treated as partly allowed. 6. V .....

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rders of authorities below. 9. We have perused the orders and heard the rival contentions. Hon'ble jurisdictional High Court in the case of Yokogawa India Ltd (supra) had held that profits eligible for relief u/s.10A of the Act was to be excluded from the total income before giving effect to set off mandated u/s.70 of the Act. As for the judgment of the jurisdictional High Court in the case of CIT v. Himatasingike Seide Ltd, [286 ITR 255], it dealt with a case of netting of loss of 100% EOU .....

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ng adjustment of ₹ 2,24,39,633/- u/s.92CA of the Act, on its international transactions with its Associated Enterprise ( AE in short). 11. Ld. Counsel for the assessee at the outset submitted that he was confining his arguments to exclusion of twelve out of 20 comparables selected by the TPO, due to their functional differences and if these were considered then other grounds relating to the TP issue need not be adjudicated. Accordingly we are confining ourselves to the grounds raised by th .....

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comparables from Prowess and capitaline data base. As per the assessee, it was earning a margin of 10% on operating cost from its associated enterprises whereas the average profit margin of the six comparables selected by it was 9.87%. As per assessee, therefore, there was no requirement of any adjustment for the pricing of its international transactions. 14. However, when the matter was referred to TPO by the AO during the course of assessment proceedings, TPO was of the opinion that the cost .....

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plying the above PLI on the operating cost of the assessee, TPO made a recommendation for an upward adjustment of ₹ 2,24,39,633/- u/s.92C of the Act. The work out of the recommended adjustment was as under : 16. When a draft assessment on the above lines was issued to the assessee it chose to move the DRP. Assessee submitted to the DRP that CPM was a better method for its case than TNMM. Assessee also raised objections on certain comparables selected by the TPO. However the DRP confirmed t .....

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ing. The companies which were to be excluded due to functional incompatability, as per the Ld. AR, were the following : 1. Avani cincom Technologies Ltd, 2. Bodhtree Consulting Ltd (BTC Ltd), 3. Celestial Biolabs, 4. E-Zest Solutions Ltd, 5. Infosys Technologies Ltd, 6. Kals Information Systems Ltd (seg), 7. Persistent Systems Ltd, 8. Quintegra Solution Ltd, 9. Tata Elxsi (seg), 10. Thirdware Solution Ltd, 11. Wipro Ltd (seg) and 12. Lucid Software Ltd. 18. As per the Ld. AR, except for BTC Ltd, .....

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good comparable in the case of 3DPLM Software Solutions Ltd (supra), since the assessee in the said case had rested its submissions on fluctuating margins of Bodhtree Consulting Ltd, However according to him here, he was seeking exclusion of Bodhtree Consulting Ltd, due to functional incompatibility. For this he relied on Mumbai bench of the Tribunal in the case of Nethawk Networks India P. Ltd,v. ITO [(2013) 37 CCH 0229]. 19. Per contra, Ld. DR submitted that the assessee was more into software .....

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rnational transactions undertaken by the assessee what has been stated by the TPO reads as under : 22. Coming to the case of 3DPLM Software Solutions Ltd (supra), which has been strongly relied on by the Ld. AR, its profile is mentioned in para 21 of the order of the coordinate bench which is reproduced hereunder: 23. What we find is that TPO had considered the assessee here to be a software service provider and the services rendered by 3DPLM Software Solutions Ltd (supra) was also on the very s .....

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record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Nonfurnishing the information obtained under section 133(6) of the .....

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under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other para .....

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of the reason why Avani Cincom Technologies was directed to be excluded was non-furnishing of information obtained u/s.133(6) of the Act. However, it is also clearly mentioned at 7.6.2 that the said company was functionally dissimilar. Same view was also taken by the coordinate bench in the case of Triology E- Business Software India P. Ltd v. DCIT [(2013) 140 ITD 540]. 24. Observation of this Tribunal with regard to Celestial Biolabs Ltd, as it appears in the case of 3DPLM Software Solutions L .....

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l in the T.P. order for Assessment Year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product / services and the segmental break up is not provided. It was submitt .....

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ftware India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that - ….. As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, 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 adjustments, the TPO has rendered this company as not qualifyin .....

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o this company has not changed from Assessment Year 2007- 08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. The learned De .....

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year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection .....

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years i.e. Assessment Year 2007- 08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in .....

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t para 14.4 of the order in the case of 3DPLM Software Solutions Ltd, (supra), is reproduced hereunder : 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give .....

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(India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed. 26. Vis-a-vis Infosys Technologies Ltd, findings of the Tribunal appears at .....

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segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellelctual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its .....

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It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to capt .....

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ems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental .....

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ssment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered .....

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e company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 10.2 Before us, the learned Authorised Representative contended that this comp .....

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rent from a software development company in the decision of the Tribunal in the case of Bindview India Pvt. Ltd. V DCIT in ITA No.1386/PN/2010. (iii) The rejection of this company as a comparable has been upheld by co-ordinate benches of the Tribunal in the case of - (a) Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011). (b) LG Soft India Pvt. Ltd. (IT (TP) A No.112/Bang/2011) (c) CSR India Pvt. Ltd. (IT (TP) A No.1119/Bang/2011) and (d) Transwitch India Pvt. Ltd. (IA No.6083/ .....

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oducts but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. Virtual Insure and La-Vision and b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate benc .....

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rom the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learne .....

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ous portions of the company s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be .....

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services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persiste .....

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it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in Outsourced Software Product Development Services for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. ( .....

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.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software develop .....

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r under consideration. It is ordered accordingly. 29. As for Quintegra Solutions Ltd, findings of the Tribunal appear at paras 18.1 to 18.3.3 of the order in the case of 3DPLM Software Solutions Ltd, (supra), and this is reproduced hereunder: 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic cir .....

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ally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rend .....

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be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company …………… have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the .....

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Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1 We have heard the rival submissions and perused .....

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roducts, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in thecase of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. th .....

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rables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 30. Vis-a-vis Tata Elxsi Ltd, (seg), findings in the case of 3DPLM Software Solutions Ltd (supra), appear at para 13.1 to 13.4.2 which is reproduced hereunder : 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparabl .....

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ign engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telecordia Technologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under .....

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ntial funds in research and development activities which has resulted in the Embedded Product Design Services Segment of the company to create a portfolio of reusable software components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons, Tata Elxsi Ltd. is clearly functionally different / dis-similar from the assessee and therefore ought to be omitted from the list of comparables. 13.3 Per contra, the learned .....

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ftware development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- …. Tata Elxsi is engaged in development of niche product and development services which is entirely .....

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for comparability analysis for determining the arm s length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 31. .....

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n of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that:- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and .....

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pany ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for .....

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he matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 32. On comparability of Wipro Ltd, in the case of 3DPLM Software Solutions Ltd (supra), findings of the Tribunal appear at para nos.12.1 to 12.4.2 of the order which reads as under : 12.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclus .....

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related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to cap .....

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ifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO s own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 12.4.1 We have heard both parties and carefully perused and .....

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the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the c .....

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ble to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 33. Coming to Lucid Software Ltd, this has been dealt with at para 16.1 to 16.3 of the order in the case of 3DPLM Software Solutions Ltd, (supra), and this is reproduced hereunder : 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a com .....

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P)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. Ltd. [ IT(TP)A No.1119/Bang/2011 ] and by the Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (ITA No.6083/De .....

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ion as laid out above and the decisions of the coordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative s .....

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ssessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dissimilar and is therefore to be omitted from th .....

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direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 34. As for Bodhtree Consulting Ltd, comparability of the said company was an issue which came up before the Mumbai Bench of the Tribunal in the case of Nethawk Networks India P. Ltd (supra). The decision was also for the very same assessment year and the segment considered was again software development services. Comparability of Bodhtree Consulting Ltd, was dealt with at par .....

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elating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in t .....

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oducts. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest techno .....

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good comparable having functional similarity. 29.3 ……... 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it .....

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