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Dy. Commissioner of Income Tax, Circle 12 (2) , Bangalore Versus M/s. PMC Sierra India Pvt. Ltd.

2016 (11) TMI 114 - ITAT BANGALORE

Exclusion of expenses incurred in foreign currency from the export turnover while computing the deduction under Section 10A - Held that:- This issue is covered by the decision of the Hon'ble jurisdictional High Court of Karnataka in the case of CIT V Tata Elxsi Ltd & Others (2011 (8) TMI 782 - KARNATAKA HIGH COURT ) wherein it has been held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should als .....

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s)-IV, Bangalore for the Assessment Year 2008-09. 2. The revenue has raised the following grounds : 1. The order of the learned CITCA) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CITCA) erred in law in directing the AO to exclude the reimbursement of expenses incurred in foreign currency both from the export turnover as well as from total turnover for the purpose of computation of deduction u / s . lOA without appreciating the fact th .....

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MIs Celestial Blolabs Ltd., MIs Flextronics Software Ltd. M/s. iGate Global Solutions Ltd., MIs lnfosys Technologies Ltd., M/s. Mindtree Consulting Ltd., M/s. Persistent Systems Ltd., M/s. Sasken Communication Technologies Ltd., M/s. Tata Elxsi Ltd. and MIs Wipro Limited as comparables. 4. On the facts and in the circumstances of the case the learned CITCA) erred in rejecting diminishing revenue filter used by the TPO to exclude companies that do not reflect normal industry trend. 5. On the fac .....

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ervices. 8. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that MIs Avani Cimcon Technologies. cannot be taken as comparable. 9. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that M/s. Celestial Biolabs Ltd., being functionally different, cannot be taken as comparable. 10. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that M/s. KALS lnformation Systems, cannot be tak .....

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reign currency from the export turnover while computing the deduction under Section 10A of the Income Tax Act, 1961 (in short 'the Act'). 5. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The revenue is aggrieved by the impugned order of the CIT (Appeals) whereby the Assessing Officer was directed to exclude the expenses incurred in foreign currency both from export turnover as well as tot .....

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fter excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon ble jurisdictional High Court reads as follows:- ………..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turno .....

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……..In section 10A, not only the word total turnover is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Sect .....

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it is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be a .....

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is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, export turnover is defined, and when the total turnover includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total tu .....

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ugned order of CIT (Appeals) qua this issue. 7. Ground Nos.3 to 10 are regarding the Transfer Pricing Adjustment made by the Transfer Pricing Officer ( TPO ) and certain comparables selected by the TPO were excluded by the CIT (Appeals). The assessee is a company incorporated under the provisions of the Companies Act, 1956, and is a wholly owned subsidiary of PMC-Sierra Mauritius Limited which is, in turn, a subsidiary of PMC-Sierra Inc., USA. The assessee is engaged in the business of providing .....

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77; 4,03,93,704. Provision of sales support services. 71,81,402 Accepted to be at arm's length. Reimbursement of expenses paid. 1,77,21,867. Accepted to be at arm's length. 8. To bench mark its international transactions the assessee has adopted Transactional Net Margin Method ( TNMM ) as Most Appropriate Method ( MAM ) with OP/ TC as PLI. The assessee selected 16 comparable companies as under : Sl. No. Name of the comparable Mark-up on Total Costs (without adjs) (%) Mark-up on Total Cos .....

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sulting Ltd 26 25 14. Lanco Global Systems Ltd 11 9 15. Computech International Ltd 5 5 16. Karuturi Networks Ltd 3 3 Mean (Average) 12 10 Thus the assessee claimed that its international transactions having operating margin of 13.17% at Arm s Length in comparison to the mean margin of comparables at 10%. The TPO rejected the TP analysis of the assessee and carried out fresh search by applying various filters like revenue from software development services should not be less than 75%, Related Pa .....

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29.08 2. Bodhtree Consulting Ltd. 18.72 19.78 3. Celestial Biolabs 87.94 81.12 4. e-zest Solutions Ltd. 29.81 30.09 5. Flextronics (Aricent) 7.86 6.57 6. iGate Global Solutions Ltd. 13.99 12.60 7. Infosys Ltd. 40.37 38.58 8. Kals Information Systems Ltd. (Seg) 41.94 29.10 9. LGS Global Ltd. 27.52 26.75 10. Mindtree Ltd. (Seg) 16.41 15.72 11. Persistent Systems Ltd. 20.31 20.91 12. Quintegra Solution Ltd. 21.74 18.89 13. R Systems (India) Ltd. 15.30 13.77 14. R S Software (India) Ltd. 7.41 9.16 1 .....

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ed the action of the TPO/A.O before the CIT (Appeals) against the selection of various companies selected by the TPO. The CIT (Appeals) applied a turnover filter with the range of ₹ 1 Crore to ₹ 200 Crores and consequently excluded 8 companies as under : 1. Flextronics Ltd. 2. iGate Global Solutions Ltd. 3. Infosys Technologies Ltd. 4. Mindtree Ltd. 5. Persistent Systems Ltd. 6. Sasken Communication Technologies Ltd. 7. Tata Elxsi Limited 8. Wipro Limited (Seg) In addition to exclusi .....

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as included one company viz. Indus Network Ltd. from the set of assessee's TP Study which was excluded by the TPO by applying employees cost filter. Thus the CIT (Appeals) has excluded 12 comparable companies selected by the TPO from the set of 20 companies and included one company namely Indus Network Ltd. Accordingly, after exclusion and inclusion of various companies the final set of comparables retained by the CIT (Appeals) is as under : SI. No. Name of the Company Mark-up on Total Costs .....

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e company excluded by the TPO whereas the assessee is aggrieved by the order of the CIT (Appeals) to the extent of not accepting the objection of the assessee against the 4 companies as under : 1. e-Zest Solutions Ltd. 2. Lucid Software Ltd. 3. Quintegra Solutions Ltd. 4. Thirdware Solutions Ltd. The assessee has raised various grounds in the cross objection, however, at the time of hearing, the learned Authorised Representative has submitted that only Ground Nos.6, 8 and 10 are effective ground .....

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idered the relevant material on record on the admissibility of the additional grounds. The learned Authorised Representative has submitted that the functional comparability of the company has been examined by this Tribunal in various cases and it was found that this company is not a good comparable. The learned Authorised Representative has also relied upon the decision of the Special Bench of ITAT, Chandigarh in the case of Quark Systems Ltd. 38 SOT 307 and submitted that even if the assessee h .....

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the case of M/s. Google India Ltd. 29 taxman.com 412 and submitted that the Tribunal has held that the employee cost filter of 25% should be applied in the ITES segment also. As regards the RPT filter of 15%, the learned Authorised Representative has submitted that in a series of decisions the Tribunal has taken a consistent view that the RPT filter should not be more than 15% and therefore the companies which are having more than 15% related party transactions should be excluded from the list o .....

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er the assessee nor the TPO has applied any employee cost filter therefore at this stage, the assessee cannot be allowed to raise such an objection which requires investigation of new facts in respect of the companies selected by the TPO as well as by the assessee. As regards the RPT filter, the learned Departmental Representative has contended that the TPO has applied 25% RPT filter which was not objected by the assessee either before the TPO or before the DRP and therefore at this stage the as .....

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nies has been selected in the TP Study, the assessee cannot be precluded from raising an objection against these companies which are found to be not comparable. This view is supported by the decision of the Chandigarh Special Bench of this Tribunal in the case of DCIT Vs. Quark Systems Pvt. Ltd. 38 SOT 307 in paras 30 and 38 as under : 30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and .....

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w when proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This has not been done in this case. We would only say that prima facie, as per the material, to which reference has .....

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avy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal. The Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations. 38. Accordingly, on facts and circumstances of the case, we hol .....

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now and not before Revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly. Thus in view of the matter that the functional comparability has already been examined by this Tribunal, we admit the additional ground raised by the assessee regarding functional comparability of E-Ze .....

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PO to exclude 5 comparable companies on the ground that their turnover exceeds ₹ 200 crores. The details of the companies are as under:- Sr No. Name of the company Turnover (Rs. in crores) 1 iGate Solutions Ltd. 406 2 Flextronics Software System Ltd. 457.45 3 L&T Infotech Ltd. 562.45 4 Satyam Computer Services Ltd. 3462.2 5 Infosys Technologies Ltd. 6859.7 12. It is pertinent to note that the CIT(A) has applied turnover slab of ₹ 1 crore to ₹ 200 crores for excluding these .....

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above illustration that it gives ambiguous result as two entities having difference of ₹ 1 crore cannot be considered as comparable, whereas on the other hand difference of ₹ 199 crores can be considered as comparable company. Therefore, such classification of comparables on the basis of companies selected on turnover basis is not appropriate and acceptable. The turnover, no doubt, is a relevant factor to be taken into account, but there should be some proper and reasonable parameter .....

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dingly, in view of the above facts of the case, we set aside this issue to the record of the AO/TPO to apply appropriate multiple or differential factor regarding the turnover of the comparable and the assessee. Both the parties have agreed in principle that an appropriate multiple of 10 times of turnover may be applied while selecting the comparable companies and therefore keeping in view of the turnover of the assessee at ₹ 45.85 Crores, the company having turnover upto ₹ 458.50 Cr .....

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ny Turnover (Rs. Crores) OP/TC (%) 1 Celestial Biolabs Ltd. 20.21 87.94 2 Flextronics Ltd. 954.42 7. 86 3 iGate Global Solutions Ltd. 781.56 13.99 4 Infosys Technologies Ltd. 15,672.00 40.37 5 Mindtree Consulting Ltd. (Seg.) 572.97 16.41 6 Persistent Systems Ltd. 383.41 20.31 7 Sasken Communication Tech Ltd. (Seg.) 335.80 7.58 8 Tata Elxsi Ltd. 342.86 18.97 9 Wipro Ltd. (Seg.) 1,955.56 28.45 By applying this multiple of 10 to the assessee's turnover, we find that 3 companies namely Sasken Co .....

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l for the same assessment year 2008-09 in the case of Telelogy India Pvt. Ltd. Vs. DCIT vide order dt.9.3.2016 in IT(TP)A No.1599/Bang/2012. Thus the learned A.R. has submitted that except the comparability of Indus Network Ltd. which was included by the CIT (Appeals) in the set of comparables the functional comparability of all other companies have been examined by this Tribunal. 10. We have considered the rival submissions as well as the relevant material on record. The ld. D.R. has submitted .....

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ppeals) and four more companies exclusion sought by the assessee have revenue from the software development services less than 75%. 11. At the outset we note that the functional comparability of 12 companies have been considered by the co-ordinate bench in the case of Telelogic India Pvt. Ltd. (supra) in para 10 as under : 10. At the outset, we note that all the functional comparability of all these 13 comparables which are sought to be excluded by the assessee were also considered by the co-ord .....

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under: S.No. Name of the Company 1 AvaniCimcon Technologies Ltd 2 Bodhtree Ltd 3 Celestial Biolabs Ltd 4 E-Zest Solutions Ltd 5 Infosys Technologies Ltd 6 KALS Information Systems Ltd (Seg.) 7 Lucid Software Ltd 8 Persistent Systems Ltd 9 Quintegra Solutions Ltd 10 Softsole India Ltd 11 Tata Elxsi Ltd (Seg.) 12 Thirdware Solutions Ltd (Seg 13 Wipro Ltd (Seg.) 22. We note that the comparability of these 13 companies have been examined by this Tribunal in series of decision as referred by the ld. .....

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the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, .....

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6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions: i) Trilogy E-Business Software India Pvt. Ltd. V DCIT (ITA No.1054/Bang/2011) ii) Telecordia Technologies India Pvt Ltd V ACIT (ITA No.7821/Mum/2011) It was also submitted that this company has been held to be functionally not co .....

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ny clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a co-ordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No. .....

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t. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR .....

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essment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability a .....

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r the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions .....

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egard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a company can be selected as a comparable only on the basis of FAR analysis conducted for that year and therefore pl .....

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r contra, the learned Departmental Representative supported the order of the TPO / DRP for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO t .....

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tional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected IT(TP)A 1380/Bang/2012 Page 7 of 34 on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on reco .....

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Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 8.0 Bodhtree Consulting Ltd. 8.1 This company has been selected as a comparable company to the assessee by the TPO; the inclusion of which was not objected to by the assessee before both the TPO and the DRP. The assessee has not ob .....

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should not be considered as comparable to the assessee. (ii) The abnormally fluctuating margins indicate that this company bears higher risk in contrast to the assessee who has earned consistent margins over the years, indicating difference in the risk profile between this company and the assessee. (iii) This company has registered exponential growth of 67% in terms of revenue and 41% in terms of profits over the immediately preceding year which can be attributed to the development of a software .....

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the assessee in this regard, at this stage, ought to be rejected. 8.4.1 We have heard both parties and perused and carefully considered the material on record. Admittedly, there is no disputing the fact that the assessee had never objected to the inclusion of this company in the set of comparbales in earlier proceedings before the TPO and the DRP. It is also seen that even in the grounds of appeal raised before us, the assessee has not raised any grounds challenging the inclusion of this ompany .....

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, in itself, cannot be reason enough to establish differences in functional profile or any clinching factual reason warranting the exclusion of this company from the list of comparables. In this view of the matter, the contentions of the assessee are rejected and this company is held to be comparable to the assessee and its inclusion in the list of comparable companies is upheld. 9. Celestial Biolabs Ltd. 9.1 This comparable was selected by the TPO for inclusion in the final list of comparables. .....

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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 submitted that :- (i) This company is engaged in the development of products in the field of biotechnology, pharmaceuticals, etc. and t .....

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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 qualifying for comparability. We therefore accept the plea of the assessee in this regard. (iv) The rejection / exclusion of this company a .....

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dered 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 Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and the .....

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is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmit .....

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sions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following .....

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comparables on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the 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 quali .....

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t Year 2007-08 by the co-ordinate bench of this Tribunal in the assessee's own case. This company has been held to be different 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(T .....

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ous parts of the Annual Report of this company. (v) This company is engaged not only in the development of software products 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 .....

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ntinues to remain the same for the year under consideration also and the same is evident from the details culled out from 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 bee .....

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d decisions of coordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company s Annual Report to establish that this company is IT(TP)A 1380/Bang/2012 Page 9 of 34 functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the coordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this compa .....

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objections raised by the assessee on the grounds that turnover IT(TP)A 1380/Bang/2012 Page 24 of 34 and brand aspects were not materially relevant in the software development 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 .....

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ny owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. 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 pa .....

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velopment; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. 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 decid .....

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y dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software .....

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d aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons :- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and .....

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td. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability p .....

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is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison o .....

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ice provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand .....

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resentative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely - (a) product design, (b) innovation design 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 Telcordia Technologies (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is .....

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ual Report of this company the description of the segment ' software development services' relates to design services and are not to software services provided by the assessee. (iv) Tata Elxsi Ltd . invests substantial 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 R .....

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nantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment " software development services" relates to design services and are not similar to software development services performed by the assessee. 13.5 The Hon'ble Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd . (supra) has held that Tata Elxsi Ltd . is not a software development service provider and therefore it is not fu .....

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etails for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata .....

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objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company .....

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bmits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be consider .....

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les by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software dev .....

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rvices 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 software 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. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to t .....

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pment 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 loss account for software development services and product development services. (ii) In the case of E-Gain Communications (P.) Ltd. v. ITO [2009] 118 ITD 243/[2008] 23 SOT 385 (Pune), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income fro .....

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It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications (P.) Ltd. (supra) has directed that since the income of this company includes income .....

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e assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a coordinate bench of the Tribunal .....

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supra).(ITA No.6083/Del/2010) (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development. The learned Authorised Representative prays that in view .....

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ntal Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of .....

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o be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the coordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi .....

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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. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.2 Before us, the a .....

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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 Telcordia Technologies India (P.) Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a .....

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tmental 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 development services provider. We find that, as submitted by the assessee, the segmental details are not given .....

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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 circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that .....

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elopment 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 rendered by the company are described as under : "Leveraging its proven global model, Quintegra provides a full range of custom IT Solution (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software p .....

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any …………… 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 company enhance its products value and also mitigate risks." (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is .....

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n. 18.3 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. 18.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is t .....

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dered 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. 18.5 We also find from the Annual Report of Quintegra Solution Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.6 Respe .....

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ted to the inclusion of this company as a comparable on the grounds that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that as per the company's reply to the notice under section 133(6) of the Act, the company has categorized itself as a pure software developer and therefore included this company as a comparable as the assessee was also a provider of software development services. Before us, in addition to the ple .....

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y requires to be omitted from the list of comparables. 19.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables as this company was a pure software development service provider like the assessee. 19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/B .....

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s, it is clear from the findings of the Co-ordinate Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd (supra) that except Bodhtree Ltd all other 12 companies were found to be not good comparables of the software development services as provided by assessee. 24. As regard the objection of the ld. DR that Quintegra Solution Ltd. has been selected by the assessee itself, we notice that the functional comparability of this company has been examined by the Tribunal in the case of .....

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the assessee, the same is required to be excluded from the set of comparables even if the said company is selected by the assessee itself. This view was taken by the decision of the Special Bench of Chandigarh Tribunal in the case QUARK SYSTEMS (P.) LTD (supra). 25. Thus, out of 20 comparables 12 companies are required to be excluded from the list of comparables for determining the ALP. Accordingly, we direct the TPO/AO to exclude the following companies from the set of comparables and recompute .....

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-ordinate bench of the Tribunal also dealt with an identical issue in para 24 (supra) and therefore when the functional comparability of these two companies have been examined by the Tribunal and it was found that these companies are not comparable with the software development services provider because of different activities as well as engaged in the software products, R&D activities and resulting in creation of Intellectual Property Rights (IPRs) then, even if these companies are selected .....

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Kodiak Network India Pvt. Ltd. (supra), we hold that 12 companies out of 13 sought by the assessee are required to be excluded from the list of comparables where as the company Bodhtree Consulting Ltd. is accepted as a good comparable of software development services provided by the assessee. Accordingly, we direct the TPO/A.O to exclude 12 companies as mentioned in para 25 of the order of the co-ordinate bench (supra) from the set of comparables and recomputed the ALP after considering the clai .....

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rected to be excluded are 15 out of the 20 of the TPO s set of comparables. 12. As regards the inclusion of Indus Network Ltd., we find that employees cost is a relevant factor for selecting the comparables. We note that the TPO applied 25% of employees cost filter while selection of the comparables which shows that the companies which are engaged in providing software development services must be doing its business through their own employees and therefore if the employees cost is less than 25% .....

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mparable of the assessee. Hence we set aside the order of the CIT (Appeals) qua this issue and direct the TPO/A.O to exclude this company from the list of comparables. 13. The next grievance of the assessee is regarding related party filter at 15% instead of 25% applied by the TPO. 14. We have considered the rival submissions as well as the relevant material on record. We note that this Tribunal has taken a consistent view about the threshold limit of RPT at 15%. A similar view has been taken by .....

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