TMI Blog2023 (9) TMI 972X X X X Extracts X X X X X X X X Extracts X X X X ..... ., Geometric Software Ltd. and Megasoft Ltd. which are sought to be excluded by the assessee on the ground that these fail the RPT filter - The issue regarding adoption of rate of RPT filter was considered by the Hon ble High Court of Karnataka in PCIT v. Yodlee Infotech P. Ltd. [ 2018 (6) TMI 1783 - KARNATAKA HIGH COURT] The AO/TPO is directed to follow the above judgment for applying the RPT filter rate. Tata Elxsi has to be excluded from the list of comparable chosen by the TPO on functional dissimilarity with the assessee company. Bodhtree Consulting is engaged in Web Service Integration including data cleansing services, data management services, e-paper solutions and completely different from assessee engaged in software development services for manufacturing and hospitality sectors. Accel Transmatics is engaged in various business models whereas the assessee is into software development services and KALS Info Systems Ltd. is into developing software products and not comparable with the assessee. Exclude Avani Cincom Technologies Ltd. from the list of comparables as functionally dissimilar. Celestial Biolabs Ltd.was basically/admittedly in clinical research an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segmental details as to how much is the sale of product and how much is from the services. Avani Cimcon Technologies Ltd. excluded from the comparables list on functional dissimilarity. Bodhtree Consulting Ltd is functionally dissimilar to the assessee which is engaged in software development services and exclude this company from the comparables list. Celestial Biolabs Ltd. company s functional profile is different from the assessee and it fails employee cost filter of 25% applied by the TPO, therefore we direct exclusion of this company. E-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand as company is engaged in eBusiness Consulting Services consisting of web strategy services, IT design services including product development consulting services which are high end ITES / KPO services and functionally different from the assessee s profile. Infosys Ltd. company has significant intangibles and huge revenue from software products and not comparable with the assessee, therefore Infosys Ltd. is excluded from the list of comparables. KALS Information Systems Ltd. (Seg) company has been held to be fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO in the order giving effect to the order of the Tribunal has not followed the direction of the Tribunal and retained the disallowance made originally. Since the issue was already allowed by the Tribunal, it was prayed that the AO be directed to allow the deduction u/s. 10A in full. 4. We have heard both the parties and perused the material on record. We notice that pursuant to the order of the Tribunal dated 14.9.2011 in the first round, the revenue had carried the matter in appeal to the Hon ble High Court of Karnataka and the Court in its judgment in ITA No.25/2012 dated 09.07.2019 affirmed the order of the Tribunal and dismissed the appeal of the revenue. It was held that the issue was covered by the decision of Karnataka High Court in M/s. Tata Elxsi Ltd. v. ACIT (2015) 127 DTR 037 (Kar) which was affirmed by the Hon ble Supreme Court in CIT v. HCL Technologies Ltd. [2018] 93 taxmann.com 33 (SC). We accordingly direct the AO to follow the earlier direction of the Tribunal and allow deduction u/s. 10A after reducing the expenses incurred by the assessee in foreign currency for deliver of software and telecommunication charges both from the export turnover as well as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vers business solutions through global software development. It is structured into two business units that focus on software developments- R D services and IT services. Persistent Ltd. Systems 209.18 The Company is primarily engaged in offering complete product life cycle services to the software product companies in infrastructure segment. Sasken Communications Ltd. (seg.) 240.03 This is a focused communication software company with presence in the broadband and wireless software space. It develops embedded communication software for companies across the communication value chain viz. network equipment manufacturers (NEM), semiconductor vendors, terminal device vendors and operators. They focus on connecting all the dots in the telecom value chain and create competitively priced software solutions that helps its customers increase their revenue base. In the context of the Indian IT industry structure, their services fall under the R D services category which is a part of IT services. Flextronics Software Systems Ltd 595.12 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a nonjurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT v. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 10. Respectfully following the aforesaid decisions of the Tribunal referred to above, we hold that the following companies whose turnover is above Rs. 200 Crores should be excluded from the list of comparable companies: 8.1 Respectfully following the decision of the Tribunal in Sterling Commerce Solutions India (P.) Ltd. (supra), we direct the AO/TPO to exclude the above six companies viz., iGate Global Solutions Ltd. (seg.), Infosys Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communications Ltd. (seg.) and Flextronics Software Systems Ltd. whose turnover is exceeding Rs. 200 crores from the comparables and also for the reason that these companies are functionally different from the assessee which is a captive service provider rendering software development services. Ground Nos.15 to 17 9. The next 3 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt part of the judgement is as under:- 17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica (P.).Ltd. (supra), wherein on the comparability of the aforesaid company, the Tribunal held as follows: 14. As far as comparable at Sl.No.6 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows: 7.7.Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the 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 AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lting Ltd. from the comparables list. 16. In ground No.21 22, the assessee submits that Accel Transmatics and KALS Info Systems Ltd. are functionally different and hence to be excluded. The ld. AR submitted that the business verticals of Accel Transmatics include healthcare equipment, consumer electronics, networking. It also renders Embedded software services, software testing, validation, migration and re-engineering, design, development and manufacture of multi-function kiosks, queue management system and ticket vending system. It also renders training services in hardware and networking enterprise system management, VLSI designs, CAD/CAM/BPO. It also manufactures software related products. From the annual report of this company, it is evident that it has sold IP rights of its product Prodigy a school management system to Accel Frontline Ltd. As regards KALS Info Systems Ltd., he submitted that it was engaged into developing software products. It was further submitted that these company were excluded in the case of Sterling Commerce Solutions India (P.) Ltd. (supra). 17. We have heard the rival submissions. We note that Accel Transmatics is engaged in various business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. 13. 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 Triology E-Business Software India (P.) Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Trilogy E-Business Software India (P.) Ltd. (supra), we direct that KALS InfoSystems Ltd. And Accel Transmatic Ltd. be excluded from the list of 20 comparable arrived at by the TPO. 17.1 In view of the above discussion, we direct exclusion of KALS Info Systems Ltd. and Accel Transmatic Ltd. from the list of comparables. 18. This appeal of the assessee for AY 2006-07 is partly allowed for statistical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the comparables by observing as under:- .2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in Trilogy E-Business Software India (P.) Ltd.'s case (supra) in para 39 41 as under : '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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude Avani Cincom Technologies Ltd. from the list of comparables. Celestial Biolabs Ltd. 23. The ld. AR submitted that this company is engaged in the business of developing software tools to offer services in the field of biotechnology, pharmaceutical and healthcare industry. This company developed a tool which has been offered as a customized tool in the field of software development for services in biotechnology, pharmaceuticals and healthcare. The risks and rewards available to a R D company engaged in supporting drug discovery are vastly different from a company which is developing and maintaining software for forex markets. This also explains the huge operating margin of 58.35% to cost. This company ought to be rejected since it is absolutely a Research Development company and therefore, functionally different from the assessee. He relied on the decision of this Tribunal in the case of Softbrands India (P.) Ltd. (supra) where this company was directed to be deleted as a comparable. 24. The ld. DR supported the orders of the lower authorities. 25. After considering the rival submissions, we note that this Tribunal in Softbrands India (P.) Ltd. (supra) has exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new 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.' 45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP. 25.1 Respectfully following the above decision of this Tribunal, we direct exclusion of Celestial Labs Ltd. from the comparables. Helios Matheson Information Technology Ltd. 26. The ld. AR submitted that this company is engaged in application integration, life cycle management and enterprise system management. It also provides a comprehensive range of support services for managing the IT infrastructure of clients and not in software development services like the assessee. He placed reliance on the decision of the Tribunal in the case of Softbrands India (P.) Ltd. (supra) and submitted that this company is not comparable with the assessee. 27. The ld. DR relied on the orders of the lower authorities. 28. After considering the submissions of both the parties, we note that this company has been excluded by the Tribunal in the case of Softbrands India (P.) Ltd. (supra) wherein it was held as under:- 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables. 30. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid company from the final list of comparable companies for the purpose of determining ALP.' Respectfully following the decision of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP. 28.1 Respectfully following the above order of this Tribunal, we hold that Helios Matheson Information Technology Ltd. is not comparable with the assessee and directed to be excluded from the comparable companies. Ishir Infotech Pvt. Ltd. 29. The ld. AR submitted that in this company selected by the TPO, compensation to employees is only 3.96% of sales. Hence this company fails the employees cost filter fixed by the TPO at 25%. The TPO and DRP has considered professional charges paid to outside consultants also while te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfotech 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. 22. 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.' Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP. 31.1 Respectfully following the above decision of this Tribunal, we remit this issue to the AO/TPO to re-examine the issue whether professional charges paid to outside consultants are also included in the employee compensation and decide the issue as per law if it satisfies 25% employee cost filter. Megasoft Ltd. 32. The ld. AR submitted that this company deals i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of this company is to be considered as comparable as operating margin of the said division alone should be considered. Since the assessee has disputed the correctness of the operating margin and relied upon the decision of the co-ordinate bench on this point accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the A.O./TPO to verify this aspect and the contention of the assessee in the light of the decision of the co-ordinate bench. 34.1 In the present case also, the TPO has computed the PLI of this company at 60.23%, whereas the assessee s claim is at 23.11%. Respectfully following the above decision of the Tribunal, we remit this issue to the AO/TPO to verify the aspect of correct computation of operating margin of this company in the light of the decision of the coordinate Bench in the case of Trilogy E-Business Software India (P.)Ltd. Thirdware Solutions Ltd 35. The ld. AR submitted that this company was selected as a comparable for AY 2007-08 which was not considered by the TPO in AY 2006-07 on the ground that it has merged with its foreign parent Thirdware Inc. Hence, it cannot be considered as a comparable in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 37.1 We find that this company deals in both products and services and manages products and applications for other product companies, whereas the assessee is into only software development services. Also, following the decision of the Tribunal in the case of Softbrands India (P.) Ltd. (supra), we direct to exclude Thirdware Solutions Ltd. from the comparable companies. Accel Transmatic Ltd. 38. This company is directed to be excluded from the comparables list for the AY 2006-07 in assessee s own case hereinabove. For the same reasons, since in the impugned AY there is no chan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that this is a Software product company which is engaged in application development and maintenance and hence not at all comparable with the Appellant. This company was excluded as a comparable by the ITAT Bangalore Bench in the case of Cypress Semiconductor Technology India P Ltd Vs DCIT (2015-63 taxmann.com 162. 43. The ld. DR supported the orders of lower authorities. 44. After hearing both the parties, we find that in Cypress Semiconductor Technology India P Ltd (supra), this company was excluded with the following observations:- 7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputed in the earlier AY 2007-08 but raised in the AY 200809 under consideration. The ld. AR filed written synopsis submitted that these companies were not included by the assessee in its TP study, but were considered and included by the TPO in the AY 2007-08 which was not contested by the assessee, whereas the assessee challenges the same in the AY 2008-09. He submitted that merely because the assessee has not disputed a TPO s comparable in a particular year, does not mean that the same has been accepted by the assessee and cannot be disputed in another assessment year considering various general developments in that year as well as specific developments/events of a particular year. Some of the information which may not be available in the public domain may become available at a later stage including interpretation of classification of activities of a particular year. Hence, the ld. AR submitted that the comparability of the above 4 companies raised by the assessee in AY 2008-09 may be considered and adjudicated. We agree with the submissions of the assessee in this regard and proceed to adjudicate the issue of comparability of companies raised by the assessee for AY 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology EBusiness Software India (P.) Ltd. (supra), we direct the A.O./TPO to omit this company from the list of comparables. 51.1 In view of the above decision of the Tribunal, we direct the AO/TPO to exclude Avani Cimcon Technologies Ltd. from the comparables list on functional dissimilarity. Bodhtree Consulting Ltd 52. The ld. AR submitted that this company is functionally different from the assessee since this company renders data management and cleansing services. Bodhtree is engaged in product engineering and content engineering services which are not comparable with the activities of the appellant. 52.1 The ld. AR submitted that this company was rejected as a comparable by the Hon ble Mumbai Bench, ITAT for AY 2008-09 in the case of Nethawk Networks India Private Limited Vs. ITO (Refer Pages 1192 to 1193, Para 23 of Paper book 2) as it was not engaged in software development services. He relied on the decision of the Mumbai Tribunal in the case of Nethawk Networks India Pvt. Ltd., [2014] 41 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy design and development of software, using the latest technologies. Further, the company has identified only one segment i.e. software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the IT Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3** ** ** 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had develope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.5 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dissimilar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by coordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P.) Ltd. (supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed. 60.1 Following the above decision of the Tribunal, we direct exclusion of this company from the comparables. Infosys Limited 61. The ld. AR submitted that this company is functionally different since it owns significant intangibles and has huge revenues from software products. The Bangalore Bench of ITAT rejected this company as a comparable in the case of 3DPLM Software So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereinabove. Further this issue was considered by the coordinate Bench of the Tribunal in 3DPLM Software Solutions Limited for AY 2008-09 (supra) and it was held as under:- 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India (P.) Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05. We further find the company has intangible in the nature of goodwill amounting to INR 3.67 crores. However, the Appellant does not have any goodwill nor it has any other intangible. (page 57 of the Annual Report of the company) 106. We find the issue of comparability of LGS to captive service provider is covered in the favour of the appellant for the same AY by the co-ordinate Bench of the Tribunal in the case of Cash Edge India (P.) Ltd. (supra) wherein it has been held as follows: 18 similarly, Assessing Officer will only take segmental results relating to services only for comparing the companies M/s Kals Information Systems, Avani Cincon, LGS Global Ltd. and Bothtree Consulting Systems as the consolidated results of these companies cannot be compared with the assessee, as assessee is admittedly into service providing activities. It is further directed that if segmental results of the above companies relating to similar services as being provided by assessee are not available, then these companies will have to be excluded as comparables as held in various judicial pronouncements relied upon by Ld. A.R.. 107. We find the decision of the co-ordinate Bench of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets owned by this company, its functions and the risk assumed are not comparable with that of the appellant company. The Bangalore Bench of ITAT rejected this company as a comparable to a software services company in the case of 3DPLM Software Solutions P Ltd (AY 2008-09) (supra) on the ground that that the company is engaged in product development and product design services and is functionally dissimilar from captive service providers like the assessee. 71. The ld. DR relied on the orders of lower authorities. 72. We have heard both the sides and perused the material on record. In 3DPLM Software Solutions P Ltd (AY 2008-09) (supra), this Tribunal excluded this company from the comparables with the following observations:- 17.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.5 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), we direct that this company i.e. Quintegra SolutionsLtd. 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. 75.1 Respectfully following the above decision of the co-ordinate bench of the Tribunal, we direct exclusion of Quintegra Solutions Ltd. from the comparables. R Systems International (Seg) 76. This ground was not pressed at the time of hearing, hence it is dismissed as not pressed. Tata Elxsi (Seg) 77. The ld. AR submitted that this company is functionally dissimilar as it has substantial revenue from products. It was decided by the Hon ble ITAT, Bangalore Bench in the case of 3DPLM Software Solutions Ltd Vs DCIT (AY 2008-09) supra that this company is to be rejected as a comparable for small software services companies like the Appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that this company is functionally dissimilar from the Appellant since it is engaged in product development, trading in software and giving licenses for use of software. No segment information is available for software development and product development services. Further, it was decided by the ITAT, Bangalore Bench in the case of 3DPLM Software Solutions Ltd Vs DCIT (AY 2008-09) (supra) that this company is to be rejected as a comparable for small software services companies. It was also observed that Thirdware is engaged in product development and earns revenue from sale of licenses and subscription, which is different from software developmental services. 81. The ld. DR relied on the orders of authorities below for retaining this company as a comparable. 82. After hearing both the sides and perusing the material on record, we note that the coordinate Bench of this Tribunal in 3DPLM Software Solutions Ltd Vs DCIT (AY 2008-09) (supra) rejected this company for comparability and it was held as under:- 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. 12.5 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 88.1 Respectfully following the aforesaid decision of this Tribunal, this company which is engaged in software development products unlike the assessee which renders software development services is rejected as a comparable with the assessee company. 89. Vide ground No.16 the assessee has sought of inclusion of 8 comparable companies as follows:- (i) Aarman Software Private Limited (ii) Cepha Imaging Private Limited (iii) Chakkilam Infotech Limited (iv) E2E Infotech Limited (v) Globsyn Infotech Limited (vi) I C R A Techno Analytics Limited (vii) VGL Softech Limited (viii) Birla Technologies Limited 90. The ld. AR submitted that the above companies were rejected by the TPO without assigning any specific reasons. He further submitted that the assessee raised this issue before the ld. DRP during the remand proceedings, however, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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