TMI Blog2017 (5) TMI 1700X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 'the Act'] by the Asst. Commissioner of Income-tax Circle 12(1),'Bengaluru, [for short AG'] for the assessment year 2007-08. 2. The assessee-company raised the following grounds of appeal: The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under: 1. Assessment and reference to Transfer Pricing Officer are bad in law (a) The final assessment order issued by the Assistant Commissioner of Income-tax, Circle-12(l), Bangalore ['AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the final assessment order issued by the learned AO is bad in law insofar as the fact that the AO did not issue to Mphasis Limited ('the Appellant or 'the Company'), a show-cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. (b) The AO has erred in making a reference to the Additional Commissioner of Income-tax -Transfer Pricing - II, ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability. (j) The TPO/AO erred on facts and in law in considering a set of 'secret data', (i.e. data which was not available in public domain), in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. 4. Comparability analysis adopted by the TPO/AO for determination of arm's length price in relation to the IT support services segment (a) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study, without considering the functional and risk analysis of the Appellant in respect of the IT support services segment. (b) Without prejudice to Ground 4(a), the AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. (c) Without prejudice to Ground 4(a), the AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules, 1963 and arbitrarily applying a 25% related party criteria in accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A and section 10B of the Act in respect to adjustments made to the export turnover (a) On the facts and in the circumstances of the case, the learned AO has erred in reducing the travel expenses amounting to ₹ 43,486,353 and ₹ 111,493,741 from the export turnover of units while computing the deduction under section 10A and section 10B of the Act respectively, irrespective of the applicant's submission that it is engaged in the business of software development and not in rendering technical services. (b) On the facts and in the circumstances of the case, the learned AO has erred in reducing the telecommunication expenses amounting to ₹ 2,637,554 and ₹ 37,541,039 only from the export turnover and not from the total turnover of the units while computing deduction under section 10A and section 10B of the Act respectively. (c) Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO has erred, inter alia, in: Reducing total travel expenses from export turnover instead of the travel expenses incurred in foreign currency, as stipulated in the definition of the term export turnover under section, 10A a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Resolution Panel (a) The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relation to the draft-assessment order and TP order issued by the AO/TPO in the proceedings before them. (b) The DRP further erred on facts and in law confirming the draft order of the AO. 16. Relief (a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. (b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. (c) Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/TPO and upheld by Hon'ble DRP is bad in law and liable to be deleted. 3. Subsequently, vide application dated 18/10/2016, the assessee sought for admission of the following additional grounds of appeal: 1. The lower authorities have erred in adopting Helios Matheson Information Ltd, Thirdware Solutions Ltd. (Seg) and Persistent Sytems Ltd as comparable even though it is functionally d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as most appropriate method and operating profit to operating cost (OP/OC) as a profit level indicator for the transferring pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee-company's profit margin was computed at 14.22% in respect of software services segment, 9.76% in respect of ITeS segment and and 9.76% in respect of IT support services. The assessee-company claimed that the same was comparable with other companies rendering software development services, and ITe services. For the purpose of transfer pricing study, the assessee-company had chosen 28 companies as comparable entities in respect of 'software development services and 9 comparables in IT support services arithmetic average of operating profit margins of said comparables was computed at 14.53%% in respect of software development services and 26.14% in respect of ITeS segment and 9.26% in respect of IT support services segment. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... W.cap adjusted Margin 1 Accel Transmatic Ltd (Seg.) 9.68 21.11% 21.1996 2 Avani Cimon Technologies Ltd 3.55 52.59% 52.14% 3 Celestial Labs Ltd 14.13 58.35% 55.23% 4 Datamatics Ltd 54.51 1.38% 0.36% 5 E-Zest Solutions Ltd 6.23 36.12% 37.01% 6 Flextronics Software Systems Ltd (Seg) 848.66 25.31% 26.02% 7 Geometric Ltd (seg) 158.38 10.71% 10.59% 8 Helios Matheson Information Technology Ltd 178.63 36.63% 35.40% 9 iGate Global Solutions Ltd 747.27 7.49% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % The TPO computed average profit margin of the comparables in respect of software development services at 25,14% and after giving working capital adjustment of 1.016%, adjusted arithmetical mean of PLI was determined at 24.13%. On the above basis, the TPO computed the transfer pricing adjustment in respect of software segment as follows: Arm's length mean margin 25.14% Less; Working capital adjustment 1.01% Adjusted mean margin after working capital adjustment 24.1396 Operating Cost (A) 4,314,471,543 Arm's length price -124.13% of operating cost (B) 5,367,966,526 Total operating Revenue (C) 4,939,4111397 Short fall being Adjustment u/s 92CA (B-C) 428,555,129 In respect of IT support service segment, the assessee-company, in its transfer pricing study had selected 9 companies. Sr. No. Name of the Company 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Limited 86.12 89.33% 87.41% 12 Flectronics Software Systems Limited (seg) 12.93 8.62% 7.30% 13 Genesys International Corporation Limited 19.17 13.35% 9.78% 14 H C L Comnet Systems Services Limited (Seg) 260.18 44.99% 45.32% 15 1 C R A Techno Analytics Limited (Seg.) 7.23 12.24% 12.65% 16 Informed Technologies India Limited 4.08 35.56% 36.06% 17 Infosys BPO Limited 649.56 28.78% 29.87% 18 I Services India Private Limited 16.29 49.47% 49.85% 19 Maple Esolutions Limited 12.29 34.05% 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The total summary of transfer pricing adjustment made u/s 92CA of the Act is as under: Segment Arms Length Price as determined by TPO Price Received / Cost Paid Adjustment u/s 92CA Software Development Services ₹ 536,79,66,526/- ₹ 493,04,11,397/- ₹ 42,85,55,129/- IT Support Services ₹ 129,26,28,315/- ₹ 99,51,71,541/- ₹ 29,74,56,774/- Total adjustment ₹ 72,60,11,903/- 8. The AO passed draft assessment order u/s 144C(3) 30/12/2010 incorporating the above adjustment and also addition of ₹ 27,80,54,948/- u/s 106 of the Act. 9. Being aggrieved, objections were filed before the Hon'ble Disputes Resolution Panel (DRP), Bangalore. It was contended before the DRP inter alia, that the very reference made by the AO to TPO is invalid in law. The Id. DRP, after upholding the validity of reference to the TPO, held that the TPO was justified in rejecting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services, like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. According to him, back office transaction process services may he as remarkable and as complicated as insurance/market transaction processing services. He, therefore, rejected the contention of the assessee and treated the 131 'O as equivalent to KPO services. 40. We have to now consider whether a BPO and a KPO are functionally similar and are comparable to each, other. BPO is a subset if, outscoring arid involves the contracting of the operations and responsibilities of specific business functions or process to a third party services provider. Often business processes outsourcing are information technology based and referred to as ITES-BPO, KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r companies from the list of comparable companies by applying the employee cost to sales filter, viz., Asit C. Mehta Financial Services Ltd., (previous known as Nucleus Netsoft and GIS Limited), Informed Technologies Ltd., Vishal Information Technologies limited (now known as Coral Hub Limited) and Accentia Technologies Ltd, The employee cost filter is an accepted filter in the matter of choosing comparables. In the case of First Advantage Offshore Services (P.) Ltd v. Dy. CIT [IT (TP) Appeal No. 1086 (Bang.) of 2011, dated 30-4-2013] in para- 35, this tribunal has held that in ITES sector also the companies which has less than 25% of the sales as employee cost should not be selected for comparability analysis for determination of ALP. 16. As far as the percentage of employee cost to sales is concerned, the Assessee has filed a chart showing the employee cost to sales in respect of the aforesaid four companies. The said chart is given as Annexure-II to this order. In respect of the percentage of employee cost to turnover there is dispute in the case of Asit C. Mehta about the percentage of employee cost to turnover, In respect of Asit C. Mehta the learned DR submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogica (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 374 (Bang. - Trib.) wherein it was held that where the RPT exceeds 15%, such companies should not be taken as comparable companies. Following the said decision, we hold that companies at SI. Nos. 5, 14 16 referred to above of the list of the comparable companies chosen by the TPO be excluded from the list of comparable companies while working out the ALP. In respect of comparable company Caliber Point, which is at Sl. No.9 of the list of comparables chosen by the TPO, the related party transaction is shown by the TPO is 13.70%. The Assessee has filed a chart before us showing RPT at 15.44%. The same is given as ANNEXURE-III to this order. We therefore remand for fresh consideration by the TPO the RPT in the case of this company after affording opportunity of being heard to the Assessee. In the event of RPT being more than 15%, the said company has to be excluded from the list of comparable companies. In the present case, the appellant had not contested the applicability of RPT filter of more than 25% of the sales applied by the TPO. In the case cited supra, RPT filter of 15% was applied by the TPO and in the circumstances, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of e4e Business Solutions India (P.) Ltd. (supra) wherein it has been held: 14. With regard to company at SI.Nos.19 23 of the list of comparable companies chosen by the TPO viz., M/s. Maple E solutions Ltd., and Triton Corporation Ltd., the Mumbai Bench of the Tribunal in the case of Stream International Services (P.) Ltd., (supra) in para 13(iii) at page-14 of the order held that the promoters of these two companies were involved in fraud for earlier years and hence the financial results of these companies are distorted and cannot be relied upon and in this regard relied on several decisions rendered by the various benches of ITAT. Respectfully following the same, we direct the aforesaid two companies be excluded from the list of comparable companies chosen by the TPO. Learned Standing Counsel has not brought anything controverting the findings of the Tribunal in the above case. Therefore, we have no reason to differ with the reasoning adopted by the co-ordinate bench in the case of e4e Business Solutions India (P.) Ltd. (supra). Therefore, we direct the AO/TPO to exclude these companies form the list of comparables. 11.7 The assessee seeks exclusion of I Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in the financial reports of the company which is placed at page 23 of the financial statement Therefore, we hold that this company is functionally different with that of pure software development service company and we direct the AO/TPO to delete this company from the list of comparables. SOFTWARE SEGMENT: 12. In respect of software segment, the assessee-company seeks exclusion of the following 16 companies. (1) M/s. Accel Transmatic Ltd: (2) M/s. Avani Cimcon Tech Ltd: (3) M/s. Celestial Laabs Ltd (4) M/s. KALS Information Systems Ltd: (5) M/s E-Zest Solutions Ltd: (6) M/s Thirdware Solutions Ltd (Seg): (7) M/s Persistent Sytems Ltd: (8) M/s Helios Matheson Information Technology Ltd: (9) M/s Infosys Technologies Ltd: (10) M/s Wipro Ltd. (Seg.) (11) M/s Tata Elxsi Ltd. (Seg.): (12) M/s Lucid Software Ltd (13) M/s Ishir Infotech Ltd (14) M/s. Megasoft Ltd: (15) M/s Flextronics Software Systems Ltd. (Seg) (16) M/s. Geometric Ltd. (Seg) It is submitted that in the case of i2 Technologies India (P.) Ltd. v. DCIT in IT (TP) Appeal No. 1189 (Bang) of 2011, 26 comparables w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies are- (1) Accel Transmatic (2) Avani Cimcon Technologies Ltd. (3) Celestial Labs Ltd. (4) KALS Information Systems Ltd. 19. The Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd, while considering the issue of improper selection of comparables has held as under: 2. (b) Avani Cimcon Technolosies 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 comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be acceptable. The decision of IT AT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. (c) 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:- i. 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. ii. 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 instalments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued As 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view 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. (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assesses 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 fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emini India (F) Ltd v. Ad, CIT12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd, the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre 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 differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Solutions Limited and Third ware Solutions Ltd., this Tribunal in the case of 3DPLM Software Solutions Ltd. LT (T.P) A. No. 1303/Bang/2012 (Assessment Year : 2008-09) order dated 28.11.2013 was pleased to hold that the aforesaid companies are not comparable with a company engaged in Software Development Services such as the Assesses. The following were the relevant observations of the Tribunal: 14. 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 Representative that this company is engaged in &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t KPO services arenot 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. 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 the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software, In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt Ltd. (supra) while d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of PTC Software (India) Pvt. Ltd. ITA. No.1605/PN/2011 (Asstt. Year; 2007-08) order dated 30.4.2013. The following were the relevant observations of the Tribunal: 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 he 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 reason advanced for including KALS Information 'Systems Ltd, is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable 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, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessees segment of IT services. 20. With regard to the inclusion of Helio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under:- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from Software products and the break-up of the software product revenues is notavailable. (iii) This company has incurred huge research 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this company from the set of comparables. It 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 of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s performed by the assesses. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt Ltd. v. ACIT (ITA No. 7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- .... Tata Elxsi is engaged in development of niche product and development, services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Tribunal in the case of Mercedes Benz Research Development India Pvt. Ltd. (cited supra) has taken a note 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 outsourcing 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, Thus, we direct exclusion of these two companies also from the list of comparables. As regards Megas of Ltd., the only objection of the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment, and (ii) software product segment. The Assessee is a pure software services provider and not a software product developer. According to the Assessee there is no break up of revenue between software products and software services business on a standalone basis of this comparable. The TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software. This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d TPO in case of other comparable, similarly placed, had adopted the margins of only the software service segment for Comparability purposes. Consistent with such stand, it was submitted that the margins of the software segment only should be adopted in the case of Megasoft also, in contrast to the entity level margins. 28. Computation of the net margin for Mega Soft Ltd. is therefore remitted to the file of the TPO to compute the correct margin by following the direction of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. 23. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to compute the correct margin of Mega Soft Ltd., as directed by the Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. (supra). We therefore, direct that the AO/TPO shall compute the correct margin of M/s Megasoft Ltd., while retaining it in the list of comparables. Accordingly, we direct the AO/TPO to consider only profit margin of the software segment for the purpose of computing while arm's length price of the transaction. As regards Flextronics Software Systems Ltd. (seg), it is submitted that it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he list of comparables. Geometric Ltd. (Seg): As regards this company, the only submission of the learned AR is that it fails RPT filer of 15% as in that case RPT to sales ratio is 19.98%, Reliance in this regard was placed on the decision of the co-ordinate bench in the case of 24/7 Customer Com (P.) Ltd. v. Dy. CIT [2012] 28 [2013] 140 ITD 344 (Bang.). We heard rival submissions and perused the material on record. In the present case, the TPO has applied RPT filter of 25%. The learned AR has not challenged the applicability of this filter. Therefore, we hold that this company cannot be excluded from the list of comparables. Corporate Issues: Ground No.9 challenges restricting the deduction u/s 10A and 10B by reducing travel expenditure and telecommunication expenses from export turnover alone. Learned AR vehemently contended that freight, telecommunication expenses and insurance attributable to delivery of software outside India are expenses incurred in foreign exchange should not be reduced from export turnover or total turnover where business of the taxpayer is only in the nature of export out of India of computer software and not rendering technical services. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns derived from on site development of computer software including services for development of software, outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. Thus, it is clarified by the legislature by inserting explanation (3) to section 10A that the profits and gains derived from, on site development of computer software including services for the development of such software outside India is deemed to be the profits and gains derived from the export of computer software outside India. In other words, the services rendered by the assessee relating to the development of computer software is deemed to be part of export turnover of computer software outside India. 14. An identical issue relating to section 80HHE of the Act was considered by this court in the case of CIT v. Motor Industries Co. Ltd. [2015] 55 taxmann.com 377 (Kar.) and this court has held that though the services rendered in deputing the software engineers abroad who among other things have to do testing, installation and monitoring of software supplied to the client, appears to be technical in nature, it does not fail within the clause of providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the absence of definition of 'total turnover' under section 10A of the Act, whether the expression, viz., 'export turnover' would have a different connotation in the application of the same formula, was considered by this court in the case of Tata Elxsi Ltd. (supra), this court while interpreting the term 'total turnover' for the purposes of section 10A of the Act has held that the total turnover is inclusive of the export turnover. Therefore, the formula for computation of deduction under section 10A is laid down as under: 'Profits of the business of the undertaking X Export Turnover (Export turnover + domestic turnover) = Total turnover' Applying the said principles of law enunciated by this court in the case of Tata Elxsi Ltd. (supra), we are of the view that the arguments advanced by the revenue if, accepted would lead to absurdity. We have no reason to differ from the Judgment of this court which is more particularly rendered in the context of section 10A of the Act. It is also to be noticed that the Judgment relied upon by the revenue in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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