TMI Blog2015 (9) TMI 1553X X X X Extracts X X X X X X X X Extracts X X X X ..... r in respect of parity between the export turnover and total turnover, in view of the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] assessee has to succeed. We direct the AO / TPO to exclude what has been excluded from the export turnover from the total turnover also while computing deduction u/s.10A Deduction / exemption given u/s.10A has to be considered independently without setting off of loss incurred in other undertakings of the assessee. See CIT (LTU) v. Yokogawa India Ltd [2011 (8) TMI 845 - Karnataka High Court ] Depreciation on computer software - Held that:- Assessee has not been able to establish that computer software and related hardware acquired by it did not give it the benefit of enduring nature. However we are of the opinion that once it was treated as a part of computer, assessee was eligible for depreciation at 60%. Ordered accordingly, Grounds treated as partly allowed. Interest income earned - income from other sources OR profits and gains from business or profession - Held that:- Assessee in our opinion has not been able to show the nexus of its interest income with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n list, could not be held back from seeking exclusion of such comparables, once proper reasons for seeking such exclusion were shown by it. Accordingly we are inclined to admit the additional grounds. 05. As to the question whether it is required to remit the issue of comparability of above mentioned four companies back to the file of AO / TPO, we shall consider it when we consider the general grounds of exclusion of comparables taken by the assessee, through its concise grounds. We also find that assessee has in the additional ground sought correction of the calculation of its deduction u/s.10A of the Act on a reasoning that AO had considered some amounts twice. 06. Coming to the concise grounds taken by the assessee, Ld. AR submitted that grounds 1, 11 and 12 are general needing no specific adjudication. TP issues are covered in grounds 2 and 3. Out of these, Ld. AR submitted that he is not contesting grounds 2.1, 2.2, 2.3 and 2.6. Ground 4 according to him was only consequential. Accordingly we dismiss grounds 2.1, 2.2, 2.3 and 2.6. 07. Grounds 2.4 and 2.5 are on exclusion of certain comparables considered by the TPO, for a reason that they were functionally dissimilar, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. While providing the above services, HPGS undertakes the following functions: Management Top level management functions including determination of business activities,preparation of strategies, establishment of operating procedures, etc are performed by HPGS associated enterprises. HPTS's role is limited to management of its day to day operations. Marketing Business Development The marketing and business development function of HPGS is limited to its customer relationship group which coordinates with the sales team of its associated enterprises to secure business assignments. The sales teams approach the HPGS customer relationship group for help in pricing and bidding for assignments only when they consider that HPGS may add value to a bid. HPGS does not attempt to identify or secure new projects individually. Intellectual Property HPGS associated enterprises retain ownership of all intellectual property that may he developed by HPGS in the course of its software development function. FIPGS is not compensated separately. Other support function Other support functions such as administration, human resources, Finance, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lter, on-site revenue filter and functional dissimilarities. Eight comparables accepted out of the list provided by the assessee included Accel Transmatics Ltd (seg), Quintegra Solutions Ltd, Sasken Communication Technologies Ltd (Seg) and Tata Elxsi Ltd (seg), which assessee is now seeking exclusion. TPO thereafter made his own analysis of the data bases mentioned above and zeroed in on 26 comparables including the eight selected from the list of assessee. List of such comparables and their average PLI is given below : Sl. No. Company Name Sales (Rs.cr.) OP to Total Cost% Product sales (Rs.1% of sales) RPT (Rs.cr.) % of RPT over Sales Export (Rs. Cr.) % of exports over Sales Onsite Revenues R D (Rs.cr.) % of R D over sales Mktg. (Rs.cr.) % of mktg. over sales % of salary /sales Data base 1 Accel Transmatic Ltd (Seg.) 9.68 21.11% 0 0.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36.63% 0 5.24 2.93% 101.86 57.02% 73.00% 0 0.00% 6.28 3.52% 35.67% P 9 IGate Global Solutions Ltd 747.27 7.49% 0 39.64 5.30% 747.27 100% 54.00% 0 0.00% 4.51 0.60% 69.74% P(EF) 10 Infosys Technologies Ltd 13149 40.30% 538/4.1% 664 5.05% 12939 98.40% 51.70% 167 1.27% 719 5.47% 45.84% P 11 Ishir Infotech Ltd 7.42 30.12% 0 1.63 21.97% 7.08 95.42% 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96.02% 4.83% 2.71 0.92% 2.35 0.80% 54.95% P 19 Quintegra Solutions Ltd 62.72 12.56% 0 0 0.00% 59.91 95.52% 48.52% 0.39 0.62% 2.02 3.22% 66.68% P 20 R S Software (India) Ltd 101.04 13.47% 0 0.85 0.84% 97.17 96.17% 68.77% 0 0.00% 1.83 1.81% 64.62% P 21 R Systems International Ltd (Seg.) 112.01 15.07% 2.68/2.39% 12.77 11.40% 105.36 94.06% 8.55% 0.63 0.56% 0.93 0.83% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm's Length Price (ALP) @ 123.26% of operating cost (a) ₹ 1180,08,60,649/- Price received (b) ₹ 1028,82,47,545/- Price charged in international transactions (c) ₹ 916,01,86,705/- Price charged in unrelated party transactions (d) = (b)-(c) ₹ 112,80,60,840/- Arm's length price of international transactions (e) = (a)-(d) ₹ 1067,27,99,809/- Shortfall being adjustment u/s 92CA (0 = (e)- (c) ₹ 151,26,13.104/- Thus TPO recommended an adjustment of ₹ 1,51,26,13,104/-. When a proposal on the above lines was made by the AO. Assessee chose to move the DRP. 14. Before the DRP, assessee argued for exclusion of various comparables for various reasons like functional dissimilarity, extra ordinary events in the comparable companies, fluctuating margins, employee cost filter, etc., However, the DRP did not accept any of these contentions and affirmed the addition proposed by the AO / TPO. Accordingly, assessment was complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the very same assessment year and for the very same software development segment. Further according to him, while selecting Flextronics Software Systems Ltd (seg), TPO had relied on information received from the said company based on a summons issued u/s.133(6) of the Act. According to him, the information provided were contradictory to the results as per the annual report of the said company. Relying on the annual report of the said company placed at paper book page 124, Vol-II, Ld. AR submitted that the audited accounts of Flextronics Software Systems Ltd (seg) was for nine months period, ending on 31.03.2007. According to him when there were differences between the audited accounts given in annual report which were available in public domain and replies given to notice u/s.133(6), the former alone could be given credence. According to him Flextronics Software Systems Ltd (seg) also had considerable product development activities. It had not segmented its software development service and products and without such segmentation according to him, it would be inappropriate to consider Flextronics Software Systems Ltd (seg) as a proper comparable. 18. Vis-a-vis R Systems Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg) are concerned, the issue of comparability of these companies had come up before this Tribunal in the case of NXP Semiconductors India P. Ltd (supra). Analysis done in the said decision was also for software development services segment and the TPO in the said case had also selected the very same set of 26 companies. Said decision being for the very same assessment year 2007-08, we are of the opinion that it can be taken as a good precedence for deciding the issue of comparability raised by the assessee herein, in so far as these companies are concerned. This Tribunal had observed as under : i) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the decision of the Tribunal in similar set of facts, these companies are directed to be excluded from the list of comparables. ii) Avani Cimcon Technologies Ltd . 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company s website, which reveals that this company has developed a software product by name DXchange , it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee s contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- 7.8 Avani Cincom Technologies Ltd. ( Avani Cincom ): Here in this case also the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to reject this company as a comparable. iii) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research development company. In this regard, the following submissions were made:- In the Director s Report (page 20 of PB-Il), it is stated that the company has applied for Income Tax concession for in-house R D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act. As per the Notes to Accounts - Schedule 15, under Deferred Revenue Expenditure (page 31 of PB-II), it is mentioned that, Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred. An amount of ₹ 11,692,020/- has been debited to the Profit and Loss Account as Deferred Revenue Expenditure (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard. 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45.From the material available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. iv) E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the 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 Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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. v) Helios Matheson Information Technology Ltd : 16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h and development expenditure to the tune of approximately ₹ 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 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 operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decision of the co-ordinate bench, we hold that these two companies are also to be excluded. 21. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. ix) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not comparable. x) Persistent Systems Ltd. 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic 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. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally 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 rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables 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. 27. Respectfully following the decision of the Tribunal referred to ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company 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 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. 25. Respecfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. xiii) 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 the inclusion of this company in the list of comparables on the ground that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO s own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emitted the issue of comparability of comparables considered in assessee s own TP study, back to TPO. Hence we are of the opinion that the issue of comparability of these three companies have to go back to AO / TPO for consideration afresh. However M/s. Avani Cimcon Technologies Ltd, Celestial Lab Ltd, E-Zest Solutions Ltd, Helios Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Thirdware Solution Ltd (seg) and Wipro Ltd (seg) have to be excluded by virtue of coordinate bench decision in the case of NXP Semiconductors India Ltd (supra). Comparability of M/s. Accel Transmatics Ltd (seg), M/s. Quintegra Solutions Ltd and M/s. Tata Elxsi Ltd (seg) is remitted back to the AO / TPO for consideration afresh as per law. Ordered accordingly. 25. Vis-a-vis Megasoft Ltd, we find that coordinate bench of this Tribunal in the very case case of NXP Semi conductors India Ltd (supra) relying on its own earlier decision in Trilogy E-Business Software India Pvt.Ltd. Vs. DCIT [ITA No.1064/Bang/2011 for AY 07-08 order dated 23.11.2012] held it to be a good comparable, but had directe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its software service segment. The product segment has employee cost of 27.65% whereas the software service segment has employee cost of 50%. Similarly, the profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both the segments are substantially different and therefore comparison at entity level is without basis and would vitiate the comparability (submissions on page 381 to 383 of the PB-I). It was further submitted that Megasoft Limited has provided segmental break-up between the software services segment and software product segment (page 68 of PB-II), which was also adopted by the TPO in his show cause notice (Page 84 of PB-I). The segmental results i.e., results pertaining to software services segment of this company was: Segmental Operating Revenues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. counsel for the assessee that this company cannot be included as a comparable in the set of comparables selected by ld. TPO on account of clear contradiction between contents of annual report and information obtained u/s 133(6). 27. Rule 10D(3) specifies the information and documents that are to be maintained by a person who is entering into international transactions. These are official publications, published accounts or those which are in public domain except for agreements and contracts to which assessee is privy. Once the annual report of a company is for a year different from the financial year ending 31st March, then without doubt, it will cease to be a good comparable, unless the information received in pursuance to a notice u/s.133(6) of the Act from such company, is reconciled with the figures available in such annual report. 28. In the case of Flextronics Software Systems Ltd (seg), no doubt the annual report was for the year ending 31.03.2007. However it was only for a nine months period. No reconciliation was attempted by the lower authorities between the figures given in such annual report with the figures which were made available by the said company to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of the Tribunal in the case of Sandstone Capital Advisors Private Limited v. ACJT in ITA No.6315/Mum! 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule IOB(4) and an another case of Pune Bench of the Tribunal in Honeywell Automation India Ltd., has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. The Id. DR contended that since the case of CMC Limited has a different financial year ending vis-a-vis that of the assessee, the same ought to have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by the Id. DR in this regard was not seriously challenged by the Id. AR. Respectfully following the precedent, we hold that this case should be excluded from the list of comparables. 30. No doubt the above decision was for A. Y. 2005-06, but the annual report of the said company placed by the assessee at paper book page No.599 show that its final accounts were being prepared on a calendar year basis even after th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was required to be made in accordance with Rule 10B(3) of Income Tax Rules. However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables. If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee s own study, then the AO / TPO has to be given a chance for verification, in view of judgment of Hon ble Pun jab Haryana High Court in the case of Quark Systems India P. Ltd (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd back to the AO / TPO for consideration afresh as per law. Ordered accordingly. 32. Once the above companies are excluded what would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (Earlier Transworks Information Services Ltd) 197.06 11.98% 8.35 4.24% 191.19 97.02% 3.38 1.72% P 3 Allsee Technologies Ltd 113.28 27.31% 13.48 11.90% 109.36 96.54% 5.91 5.22% P 4 Apex Knowledge Solutions Pvt. Ltd 6.64 12.83% 0 0.00% 6.64 100.00% 0.01 0.15% P (Soft) 5 Appollo Healthstreet Ltd 47.84 -13.55% 8.5 17.77% 47.8 99.92% 0.53 1.11% P (Soft) 6 Asit C. Mehta Financial Services Ltd 6.09 24.21% 0.96 15.76% 4.18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .28% P (Soft) 16 Informed Technologies India Ltd 4.08 35.56% 0.65 15.93% 4.08 100.00% 0.61 14.95% P 17 Infosys BPO Ltd 649.56 28.78% 48.3 7.44% 608.87 93.74% 41.49 6.39% P 18 I Services India Pvt Ltd 16.29 49.47% 0 0.00% 16.29 100.00% 0.2 1.23% C 19 Maple Esolutions Ltd 12.21 34.05% 0 0.00% 12.21 100.00% 0.02 0.16% P 20 Mold-Tek Technologies Ltd (Seg.) 11.4 113.49% 0.12 1.05% 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength Margin 28.61% of the Operating Cost Arm s Length Price (ALP) @ 128.61% Rs.332,96,12,566/- Price shown by the assessee Rs.279,24,76,527/- Shortfall being adjustment u/s.92CA Rs.53,71,36,039/- 35. TPO recommended an adjustment of ₹ 5,37,36,019/- in the ITES segment. When a proposal on the above lines was made assessee chose to move the DRP. However the DRP rejected its contentions and confirmed the recommendations of the TPO. Assessment was completed making an addition of ₹ 52,71,36,039/- in the ITES segment. 36. Now before us, Ld. AR submitted that out of the 27 comparable companies considered by TPO, Accentia Technologies Ltd, Asit C Mehta Financial Services Ltd, Informed Technologies India Ltd, Spanco Ltd (seg) and Vishal Information Technologies Ltd, failed the employee cost filter and had to be excluded. Reliance was placed on the following decisions of the Tribunal : i) First Advantage Offshore Services P. Ltd v. DCIT [IT(TP)A No.1086/Bang/2011, dt.30.04.2013]. ii) Stream International Services P. Ltd v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was placed on Mumbai Bench decision in Sandstone Capital Advisors P. Ltd v. ACIT [ITA.6315/Mum/2012, dt.06.12.2013], Savan Technologies P. Ltd v. ACIT [ITA No.1456/Hyd/2010, dt.10.01.2014 and Telelogic India P. Ltd v. DCIT [ITA.166/Mum/2011, dt.18.05.2015]. 41. Per contra, Ld. DR supported the orders of lower authorities. According to him, grounds raised by assessee for exclusion of companies which it had not sought exclusion at lower levels, required a fresh consideration by the AO / TPO. 42. We have perused the orders and heard the rival contentions. Coordinate bench of this Tribunal has held in First Advantage Offshore Services P. Ltd (supra) that employee cost filter is one which had to be applied while selecting comparables in ITES segment. Tribunal held as under in its order : 32. The group 2 consists of the companies which are to be excluded by applying the employee cost filter, these companies are - 1) Accentia Technologies Ltd. 2) Informed Technologies India 3) Vishal information Technologies Ltd. 33. According to the learned counsel for the assessee, these companies do not satisfy the employee cost filter of being more than 25%. He submitted that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, if the employee cost filter of 25% is applied, Accentia Technologies Ltd, Asit C Mehta Financial Services Ltd, Informed Technologies India Ltd, Spanco Ltd (seg) and Vishal Information Technologies Ltd, would go out of the list of comparables. We are of the opinion that this requires a fresh look by the AO / TPO. We therefore set aside the issue of comparability of the above five companies in the ITES segment and remit it back to the AO / TPO for consideration of the employee cost filter after verifying the work out submitted by the assessee in this regard. Ordered accordingly. 43. As for Bodhtree Consulting Ltd (seg), Pune Bench of the Tribunal in the case of Affinity Express India P. Ltd (supra) had held as under at para 5 to 8 : 5. Before CIT(A) the assessee vehemently challenged the inclusion of M/s. Bodhtree Consulting Ltd., as a comparable. It was argued that the company is into the business of software development services and hence not functionally similar to that of the assessee. It was argued that as per the business description in its annual report for the year ended 31- 4 03-2007 not only its line of business is completely different but also its FAR is differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be appropriate to reproduce the analysis by the assessee of itself, on its own call-centre work, appearing at para 25.1 to 25.3 of TP order : 25 Functions, Assets and Risks Analysis done by the taxpayer 25.1 Functions Currently. . the services offered by IIPGS through the Global Solutions Centre Bangalore ( GSCB ) are voice and e-mail support. HPGS has entered into a General Services Agreement with its associated enterprises, for provision of technical call centre services through voice and email support. The functions performed by HPGS in relation to the provision of technical call centre services rendered by it are summarized below. Provision of services Based on the service requirements, the actual services are provided by HPGS through its contact centre in India, which is equipped with the necessary infrastructure and personnel. Associated enterprises provide training to HPGS for rendering the technical call centre services at the required quality levels. Technology transition and infrastructure set up Associated enterprises are responsible for establishing processes for identification and routing of email service requests or inquiries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Equipment 44,079,779 Computer Software 2,336,578 25.3 Risks The taxpayer has given its risk profile as under in its TP report. 4.1.2 Risks assumed Service delivery risk In this case, if the services rendered by HPGS do not meet the expectations of the associated enterprises. IIPGS is not directly responsible. Associated enterprise bear the service delivery risk, as it enters into contracts with customers and are responsible jar any liability far defective services. Market Risk. The associated enterprises would be responsible for identifying and retaining clients and therefore the market risk would lie with them. Thus, HPGS assumes no market risk. Foreign exchange risk HPGS earns its revenues in USD whereas it incurs expenses in the INR. Associated enterprises make all payments to HPGS in USD which is its local currency. Any. adverse movement in the exchange rate would directly impact the profitability of HPGS. Thus the risk associated with adverse movements of exchange rates is borne In HPGS. Credit risk HPGS invoices associated en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions India P. Ltd (supra) had also considered comparability of Infosys BPO Ltd and Mold-Tek Technologies Ltd. It was held that these companies were providing market analytics and data management services. However as mentioned by us AO / TPO had not verified whether the services provided by assessee fell within lower end or upper end. We therefore set aside the issue of comparing Eclerx Services Ltd, Infosys BPO Ltd and Mold-Tek Technologies Ltd back to the AO / TPO for considering afresh after properly analysing the services rendered by the assessee to its AEs in the ITES segment. Ordered accordingly. 46. Vis-a-vis Wipro Ltd (seg) no doubt, Mumbai Bench of this Tribunal in the case of Stream International Services P. Ltd, held as under at para 13 (xiv) : (xiv) Wipro Ltd (seg ) : The facts of this company are similar to the facts of Infosys BPO Ltd. Considered by us at Sl.No.(vi). For the similar reason, this company is also directed to be excluded from the final list of comparables. What we find is that Coordinate Bench had followed its own directions in the case of Infosys BPO Ltd. In so far as comparability of Infosys BPO Ltd is concerned, we have in the preceding para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with law. Ordered accordingly. 48. Coming to Caliber Point Business Solutions Ltd, H C L Comnet Systems Services Ltd (seg) and R Systems International Ltd (seg), it is not disputed that accounting year of these companies were not financial year, or in other words the audited accounts and annual reports were not for an year ending 31.03.2007. Comparability of a company having a different year than the one followed by the assessee, was an issue which had come up before various coordinate benches of this Tribunal. In the case of Sandstone Capital Advisors P. Ltd v. ACIT [ITA.6315/Mum/2012, dt.06.02.2013], Mumbai bench of this Tribunal had held as under : 9.1 On the other hand, the ld DR has submitted that the company s financial accounts are prepared on 30.6.2007; therefore, the data for the entire financial year are not available and only for 3 months data were available. Therefore, in view of the decision of the Pune Benches of the Tribunal in the case of Honeywell Automation India Ltd vs DCIT in ITA No. 4/PN/08 vide order dated 10th Feb 2009. This company may not be considered as a comparable for want of financial results for the entire year. 10 We have considered the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles. In the case of Telelogic India P. Ltd v. DCIT [ITA No.166/Mum/2011, dt.18.05.2015, also a similar view was taken. 50. In line with the above orders, we direct the exclusion of Calibre Point Business Solutions Ltd, HCL Comnet Systems Services Ltd and R. Systems International Ltd, from the list of comparables in ITES segment. 51. Accordingly we direct the AO / TPO to rework the average PLI of the comparables after considering our directions at para 42 to 49 above and thereafter make an analysis of the pricing of the international transactions of the assessee in the ITES segment. Ordered accordingly. 52. Now we shall consider the corporate tax issues raised vide grounds 5 to 10. In grounds 5 6 asssessee assails exclusion of expenditure incurred in foreign currency expenditure of ₹ 3,361,467,945/-, while working out the eligible relief u/s.10A of the Act. Alternatively it pleads that whatever is excluded from the export turnover has to be excluded from the total turnover. 53. We have perused the orders and heard the rival contentions. As for the contention of the assessee foreign currency expenditure ought not to be excluded from the export turnover, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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