TMI Blog2016 (2) TMI 1163X X X X Extracts X X X X X X X X Extracts X X X X ..... P.K. Prasad, CA for the Appellant. P.K. Sri Hari, Addl. CIT (DR) for the Respondent. ORDER Vijaypal Rao, Judicial Member These cross appeals are directed against the order dated 31.12.2012 of Commissioner of Income Tax (Appeals)-IV, Bangalore for the Assessment Year 2007-08. The assessee has raised the following grounds in its appeal: The grounds taken by the Appellant are without prejudice to one another. 1. That the order passed by the learned Commissioner of Income Tax (Appeals) - IV, Bangalore ('CIT (Appeals)'), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2. That the learned CIT (Appeals) erred in upholding the rejection of Transfer Pricing ('TP') documentation by the learned Transfer Pricing Officer ('TPO')/Assessing Officer ('AO') and in making an adjustment to the transfer price of the Appellant in respect of its software development services by ₹ 76,95,410 and in the information technology enabled services by ₹ 20,31,990. 3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in; (a) Upholding the rejection of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lts reported by the assessee are as under :- Description Software Development Services IT enables Services (Rs.) Amount (Rs.) Operating Revenue ₹ 18,28,00,964/- 8,66,47,650/- 26,94,48,614/- Operating Cost ₹ 16,10,69,406/- 7,30,18,028/- 23,40,87,434/- Operating Profit (PBIT) ₹ 2,17,31,558/- 3,53,61,181/- 3,53,61,180/- Operating Profit to Cost Ratio 13% 19% 3. The assessee has reported international transactions in these two segments as under :- 1. Contract Software Development Services ₹ 18,28,00,964/- Readjustment done by TPO 2. IT enabled Services ₹ 8,66,47,650/- Readjustment done by TPO 4. The assessee in its T.P. analysis has bench marked its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiple year data instead of current year. The TPO carried a fresh search and selected 26 comparables. The set of comparables selected by the TPO are as under : Sl. No. Comparable Company Name OP to Total Cost % as per TP Order(after WC) 1. Accel Transmatic Ltd (Seg) 19.16 2. Avani Cincom Technologies Ltd 50.12 3. Celestial Labs Ltd 53.20% 4. Datamatics Ltd -1.48 5. E-zest Solutions Ltd 35.05 6. Flextronics Software Systems Ltd 24.08 7. Geometric Ltd (Seg) 8.71 8. Helios Matheson Information technology 33.43 9. I Gate Global Solutions Ltd 4.72 10. Infosys Technologies Ltd 37.95 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company Name OP to Total Cost % (before working capital adjustment) OP to Total Cost % (after working capital adjustment) 1. E-Zest Solutions Ltd. 36.12 35.0535.05 2. KALS Information Systems Ltd. (Seg.) 30.55 22.47 3. Lucid Software Ltd. 19.37 16.11 Mean Margin After Working Capital Adjustment 73.63/3 24.54 7. Thus the CIT (Appeals) has deleted/excluded all the companies selected by the TPO against which the assessee raised objections except KALS Information Systems (seg.) and Lucid Software Ltd. The assessee did not raised any objections against eJust Solutions. Accordingly the CIT (Appeals) recomputed the Mean Margin of three companies after working capital adjustment at 24.54% and confirmed the TP adjustment to the extent of 77, 410 as against the original 1,39,53,888. The CIT (Appeals) granted part relief to the assessee in respect of the TP adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. Consequently, the impugned order of the CIT (Appeals) whereby applied filter of 0% RPT is set aside. Hence we direct the Assessing Officer/TPO to apply the RPT filter of 15% and then select the comparables. 10. Now we will take up the functional comparability of the other companies selected by the TPO/A.O. 10.1.1 Accel Transmatic Ltd. (Seg.) : This company was selected by the TPO for determining the ALP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Departmental Representative has submitted that the CIT (Appeals) has not examined the functional comparability of this company and rejected the same/excluded the same by applying 0% RPT filter. He has relied upon the finding of the TPO and submitted that the TPO has examined the functional comparability of this company and the assessee did not dispute before the TPO or before the CIT (Appeals). 10.1.3 We have considered the rival submissions as well as relevant material available on record. Therefore, this company cannot be excluded from the list of comparables. There is no dispute that the assessee did not object this company as comparable by the TPO. Even before the CIT (Appeals) the assessee did not raise any objection for inclusion of this company. However, the CIT (Appeals) has excluded this company by applying 0% RPT filter. Thus the revenue is aggrieved by the order of the CIT (Appeals) on the issue of applying 0% RPT filter. As regards the functional comparability of this company, this issue does not emanate as the assessee did not raise any objection against the comparability of this company. Further the assessee has not filed any additional ground for exclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ories as clearly reported by the auditor of the assessee. Further this company has received the revenue of ₹ 3,54,77,523 as earning in foreign exchange of software export services. From the profit and loss account, this company has reported only one source of income from operations and that is export in foreign currency. Apart from this revenue, only a minor amount has been shown from the interest in the profit and loss account. Further, we find that there is no other revenue generating source during the year under consideration. Therefore, we find from the Annual Report of the company, there is one segment i.e. software exports. Thus the contention of the assessee is that this company is in the diversified activity is not found support from the record and therefore it is contrary to the record. The decisions relied upon by the assessee also does not give any finding of fact on functional dissimilarity but the earlier order of the Tribunal in some other cases has been followed in these decisions. There is no independent finding by analysing the facts on record in these decisions. Therefore when we analyse the relevant record and details as given in the annual report, profit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mum.) of 2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment was examined. 10.3.1 It was submitted by Ld A R of the assessee that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. Thus this company cannot be considered as a comparable of assessee for the reason that this company has diverse business and this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 10.3.2 On the other hand Ld D R has relied upon the order of the TPO and submitted that this company has been classified as software development company and therefore the main activity is similar to that of assessee. 10.3.3 We have considered the rival submissions as wellas relevant material on record. The business activities of this company has been examined and analysed by the Mumbai Bench of the Tribunal in the case of Teva Pharma (P.) Ltd. (supra) wherein the tribunal has observed as under: The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard.' Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. Having regard to the above facts and circumstances as well as the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma (P.) Ltd. (supra) we are of the view that this company was basically in clinical research and manufacture of bio products and other products and therefore, this company cannot not be considered as good comparable of assessee. 10.4 Datamatrics Ltd. : This company is not disputed or contested by any of the parties though the CIT (Appeals) has deleted this company from the list of comparables on the ground of related party transactions. We find that the revenue from RPT of this company is 13.1% and therefore it is much below the threshold of 15% as discussed in the foregoing paragraphs. Thus in the absence of any objections on the functional comparability of this company by the assessee either before the authorities below or before us by way of additional ground, we restore this company to the list of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-ordinate bench of this Tribunal incase of M/s. Intoto Software India Pvt. Ltd. (supra) we also direct the Assessing Officer/TPO to exclude both these companies. It has been brought to our notice that the finding of the Tribunal in case of DE Shaw India Software Pvt. Ltd. has been upheld by the Hon'ble High Court. By following the decision of the coordinate Bench at Hyderabad as well as Hon'ble High Court, we direct the TPO/A.O. to exclude this company from the list of comparables for determining the ALP. 10.7.1 Geometric Ltd. (Seg.) : The assessee objected the inclusion of this company before the TPO. The CIT (Appeals) excluded this company from the set of comparables on the ground of RPT filter. 10.7.2 We have heard the rival submissions and considered the material on record. It is not disputed that the Related Party revenue is 19.98% of total sale of this company. Therefore, this company fails the filter of threshold limit of 15% RPT. Accordingly, we do not find any reason to interfere with the finding of the CIT (Appeals) to exclude this company from the list of comparables. 10.8 Helios Matheson Information Technology and I gate Global Solutions Ltd. : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. The functional comparability of this company has been examined by the Delhi Bench of this Tribunal in case of Agnity India Technologies (P.) Ltd. (supra) and the finding of the Tribunal has been upheld by the Hon'ble Delhi High Court that this company cannot be compared with an ordinary entity because of the scale of operations and brand value. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. Accordingly we direct the TPO/AO to exclude this company from the list of comparables for determining the ALP. It is ordered accordingly. 10.10.1 Ishir Infotech Ltd. : The assessee objected to the inclusion of this company on the ground of RPT at 22%. The CIT (Appeals) excluded from the list of comparables by applying the filter of RPT. 10.10.2 We have heard the learned Authorised Representative as well as learned Departmental Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Business Software India Pvt. Ltd. (supra): (d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India (P.) Ltd. v. Dy. CIT IT Appeal No 1386/PN/2010 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)-training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee objected the inclusion of this company in the list of comparables on the ground of functional dis-similarity. The CIT (Appeals) has confirmed the inclusion of this company in the list of comparables and rejected the contention of the assessee. 10.13.2 Before us, the learned Authorised Representative has submitted that this company is a software product company. The company has debited the expenditure to the profit and loss account as work in progress. Further, this company has employed about 30% of total capital in product development expenditure as per the balance sheet. The learned Authorised Representative has pointed out that the Tribunal in assessee's own case for the Assessment Year 2006-07 has excluded this company from the list of comparables. He has relied upon the following decisions : Cases pertaining to Asst. year : 2007-08 Cases pertaining to other Asst. years CSR India (P.) Ltd. (supra) Ariba Technologies India (P.) Ltd. (supra) DE Shaw India Software (P.) Ltd. (supra). This Tribunal ruling has been upheld by the high court for the State of Telangana and Andhra Pradesh - ITTA No. 433 of 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee. ** ** ** 15. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Logica Private Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Logic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent decision in the case of Huawei Technologies India (P.) Ltd. (supra), the Tribunal has again examined the functional comparability of this company in paras 26 27 as under :- '26. As far as Sl. No. 24 viz., Megasoft Ltd. of the list of comparables chosen by the TPO given in the chart at para-12 of this order is concerned, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) had held that only segmental data should be taken for the purpose of comparison. Following are the relevant observations of the Tribunal:- 37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xistence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. 27. In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison.' In view of the decision of the co-ordinate bench of this Tribunal, we hold that the segmental margins of this company relating to providing software services are comparable to the assessee's software development service segment and therefore we direct the A.O./TPO to consider only segmental data relating to providing software services of this company i.e. Megasoft Ltd. 10.16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the inclusion or exclusion of these companies. Accordingly, no specific adjudication is required in respect of these two companies. The order of the CIT (Appeals) is upheld for these two companies. 10.20.1 Tata Elxsi Ltd. (Seg.) : The assessee objected the inclusion of this company in the list of comparables on the ground of R D filter as well as functional dis-similarity. The CIT (Appeals) has excluded this company on all three grounds of RPT filter as well as functional dis-similarity. 10.20.2 The learned Authorised Representative of the assessee has submitted that this company is engaged in diversified activities including embedded product design services, industrial design and engineering, animation and visual effects, and system integration services. This company is having unique IP portfolio comprising re-usable software components and ready-to- deploy product frameworks. Further this company is engaged in R D activities resulting in certain IPRs. He has further submitted that the functional comparability of this company has been examined by this Tribunal in assessee's own case for Assessment Year 2006-07. He has relied upon the following decisions : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties. 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl. No. 6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl. No. 24 viz., Tata Elxsi Ltd. should be rejected as a comparable. 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO.' In view of the above facts, we direct the A.O/TPO to exclude this company from the list of comparables. 10.21.1 Thirdware Solutions Ltd. : This company was selected by the TPO and included in the list of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company has 55 centres of excellence and 30 innovation products. It has also set up a handset mobile tested lab and engaged in R D activity. Thus this company cannot be compared with the assessee. He has relied upon the following decision : Cases pertaining to Asst. year : 2007-08 Systech Integrators India (P.) Ltd. (supra) 10.22.3 On the other hand, learned Departmental Representative has submitted that when the TPO has considered ITES segment of this segment than the other activity of this company are not relevant for determining the ALP. Thus he has submitted that this company is engaged in the similar activities and therefore is a good comparable. He has relied upon the order of the TPO. 10.23.4 We have considered the rival submissions and the relevant material on record. The assessee objected to the inclusion of this company in the list of comparables on the ground that it fails the R D filter as well as the functional dis-similarity. The CIT (Appeals) excluded this company from the list of comparables as it was found functionally dissimilar to the assessee. There is no dispute that this company is having significant investment in acquiring new business and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Birla Minacs Worlwide Ltd (Earlier Transworks Information Services Ltd.) 10.32 7. Triton Corp Ltd. 25.07 8. Galaxy Commercial Ltd 11.47 9. C M C Ltd 30.78 10. DatamaticsSoftworld Pvt. Ltd 3.85 11. Goldstone Teleservices Ltd -67.94 12. National Securities Depository Ltd 29.17 Mean Margin 7.77% The assessee has computed the mean margin of these comparables being OP/TC at 7.77% and claimed that the assessee's international transaction is at arm's length having margin of 19%. The TPO rejected the 9 of the comparables selected by the assessee in its Transfer Pricing analysis except the four companies which are at S.Nos.4, 5, 6 7 as under :- Comparable Company Without Adjs. Mark up on Total Cost (after WC) % Cosmic Glo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .51 0.00 9. Cosmic Global Ltd (Tulsyan Technologies Ltd) 10.70 10.70 10. Datamatics Financial Services Limited (Seg) 3.66 3.66 11. Eclerx Services Ltd. 85.22 0.00 12. Flextronics Software Systems Limited (Seg) 5.42 0.00 13. Genesys International Corporation Ltd 7.90 7.90 14. HCL Comnet 43.28 0.00 15. ICRA Techno Analytics Ltd (Seg) 10.78 10.78 16. Informed Technologies Ltd 34.07 0.00 17. Infosys BPO Ltd 27.90 0.00 18. IServices India Ltd 47.80 47.80 19. Maple E S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% RPT is appropriate in the case of the assessee. The companies which are included in the set of comparables and having upto 15% revenue from RPT are required to be examined on other grounds including functional comparability. The CIT (Appeals) has retained 8 comparables which are as under :- Sl. No. Company Name OP to Total Cost % (before working capital adjustment) OP to Total Cost % (after working capital adjustment) 1. Accentia Technologies Ltd. (Seg.) 30.61 25.43 2. Apex Knowledge Solutions Pvt. Ltd. 12.83 12.38 3. Bodhtree Consulting Ltd. (Seg.) 29.58 28.86 4. Cosmic Global Ltd. 12.40 10.70 5. IServices India Pvt. Ltd. 49.47 47.80 6. Maple Esolutions Ltd. 34.05 29.48 7. Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on turnover filter. We find that the RPT revenue of this company is 17.77%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (vi) Asit C Mehta Financial Services Ltd. : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on turnover filter. We find that the RPT revenue of this company is 15.76%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (vii) Bodhtree Consulting Ltd (Seg.) : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparable on the ground that there is extra-ordinary profit as well as extra-ordinary event in this company during the year under consideration. Further, the assessee also contended that the RPT revenue of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it has not been specifically dealt with by the authorities below. Further, from the Annual Report of this company, we find that the objection raised by the assessee pertains to the advances given by this company to the Associated Enterpries (AEs) and reported that the same was taken as RPT. The advance to the AEs does not pertain to the ITES segment and further it is not a operational trading activity of the said company to be considered as RPT for the purpose of uncontrolled comparable price. Accordingly, we do not find any merit in the objections of the assessee, even on the ground of RPT. (viii) Caliber Paint Business Solutions : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparables on the ground that it has 23% revenue from RPT and further this company is engaged in R D activity and also functionally different. The CIT (Appeals) excluded this company on the ground of 0% RPT filter as this company was stated to have 13.69% RPT. Before us, the learned Authorised Representative of the assessee has submitted that this company fails the RPT filter of more than 15% as this company has shown/reporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany has to be decided on basis of functional similarity or dis-similarity. The ld. AR submitted that this company is rendering services like engineering, designing services which requires highly skilled employees. Thus, this company cannot be selected as comparable because their functions are different. He has relied upon the decision of Special Bench of Mumbai Tribunal in the case of Maersk Global Centres (India ) (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 83/43 taxmann.com 100 and submitted that this company is rendering highly skilled services and cannot be compared with the service of ITES and accordingly, this company should be deleted from the set of comparables. On the other hand, the ld. DR has relied upon the orders of authorities below and submitted that the TPO has considered the functional comparability at the time of selecting this company. We have considered the rival submissions and relevant record. At the out set, we note that the comparability of M/s Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India ) (P.) Ltd. (supra) in para 82 and 83 as under : 82. In so far as M/s eClerx Services Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP. As discussed by the Special Bench in the case of Maersk Global Centres (India) (P.) Ltd. (supra), this company provides data analysis and data process solution and is recognised as experts in chosen market financial services, retail and manufacturing. It was found to have being providing complete business solutions. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the software development services. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables. (xii) Flextronics Software : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparable as it fails R D filter and also having ITES segment. The CIT (Appeals) excluded this company by accepting the contention of the assessee on R D filte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (xv) I C R A Techno Analytics Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range this company having RPT at 1.85% is restored back to the set of comparables. (xvi) Informed Technologies Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on RPT filter. We find that the RPT revenue of this company is 15.93%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (xvii) Infosys BPO Ltd. : This company was selected by the TPO and included in the list of comparables. The assessee objected against inclusion of this company in the set of comparables before the CIT (Appeals) on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agnity India Technologies (P.) Ltd. (supra) Agnity India Technologies (P.) Ltd. (supra) NTT Data India Enterprise Application Services (P.) Ltd. v. Asstt. CIT [2013] 40 taxmann.com 173 (Hyd. - Trib.) Motorola India Electronics (P.) Ltd. v. ACIT [IT Appeal Nos. 1274 1413/Bang/2008]. Logica (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 374 (Bang. - Trib.) On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and submitted that when this company is in the business of ITES then it is functionally comparable with that of the assessee. The assessee did not object the inclusion of this company in the list of comparables before the TPO. We have considered the rival submissions as well as the relevant material on record. The contention of the ld. A.R. of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Thus it was found that this company is functionally dis-similar to the ITES service provider company as it provides end to end solutions in technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his contention, he has relied upon the following decisions :- CASES PERTAINING TO ASST. YEAR Market Tools Research (P.) Ltd. v. Asstt. CIT [2014] 150 ITD 296/[2013] 32 taxmann.com 358 (Hyd. - Trib.) Capital IQ Information Systems (India) (P.) Ltd. (supra) Knoah Solutions (P.) Ltd. [IT Appeal No.1407 (Hyd.) of 2013 On the other hand, the learned Departmental Representative has submitted that this company is in ITES and the CIT (Appeals) has excluded this company by holding that this company is a KPO and not a BPO. However, mere nomenclature of KPO and BPO cannot be a ground for inclusion or exclusion of a company in this list of comparables without examining the actual functions performed by the company. We have heard the rival submissions and the relevant material on record. We find that this company is providing highly technical and specialized engineering services. The functional comparability has been examined by the Special Bench of the Tribunal in the case of Maersk Globle Solution (supra) and it was held that this company cannot be compared with an ordinary ITES. The assessee before us is providing only back office support to the parent company. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the third party vendors. He has referred the relevant part of the Annual Report and submitted that the job work expenditure is significant which shows that this company is outsourcing the services to third party and therefore this company cannot be considered as a good comparable. The learned Authorised Representative has further pointed out that for the Assessment Year 2006-07, this Tribunal has held that this company cannot be considered as a good comparable. He has also relied upon the decisions as under : Zavata India (P.) Ltd. v. Dy. CIT [2013] 35 taxmann.com 423 (Hyd. - Trib.) Capital IQ Information Systems (India) (P.) Ltd. v. Asstt. CIT [2012] 26 taxmannn.com 31/149 ITD 809 (Hyd. - Trib.) Cognizant Technology Services (P.) Ltd. v. Asstt. CIT [2014] 151 ITD 191/47 taxmann.com 209 (Hyd. - Trib.) Avineon India (P.) Ltd. v. Dy. CIT [2014] 150 ITD 543/41 taxmann.com 334 (Hyd. - Trib.) On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that as far as the functions of this company is concerned, it is very much similar to that of the assessee in providing ITES services. We have heard th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the out-sourcing cost was at 88.64% of the operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Asstt. CIT v. Maersk Global Services Centre (India) (P.) Ltd. [2012] 14 ITR(Trib) 541 (Mum.) the Mumbai Bench of the Tribunal has analysed and rejected this company as comparable for the reason that it has outsourced a considerable portion of it's business and is functionally different. Moreover, it was also submitted that the DRP in the later year of 2008-09 vide its order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technology Ltd.) was not a suitable comparable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee as it has made significant investment in the business acquisition. He has referred the relevant part of the Annual Report and submitted that this company has reported a huge investment in acquisition of the business. This company is also engaged in the business of innovation, technology innovation, process innovation and delivery innovation. It also earns about 8% from innovation activity and also having more than 13 engineering patents, enterprises, business and quality. This company has 55 centres of excellence and 30 innovation products. It has also set up a handset mobile tested lab and engaged in R D activity. Thus this company cannot be compared with the assessee. He has relied upon the following decisions : Market Tools Research (P.) Ltd. (supra) Intoto Software India (P.) Ltd. v. Asstt. CIT [2014] 146 ITD 360/[2013] 35 taxmann.com 421 (Hyd. - Trib.) On the other hand, learned Departmental Representative has submitted that when the TPO has considered ITES segment of this company than the other activity of this company are not relevant for determining the ALP. Thus he has submitted that this company is engaged in the similar activities and therefore is a good ..... 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