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TMI Blog2015 (9) TMI 1553X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of DCIT v. Quark Systems P. Ltd [(2011) 42 DTR 414]. According to him, four of the comparables considered by the TPO, namely, Accel Transmatics Ltd (seg), Quintegra Solutions Ltd, Sasken Communication Technologies Ltd (Seg) and Tata Elxsi Ltd (seg), required to be excluded though these appeared in the original list of the assessee itself. As per the Ld. AR, TP issues being evolving in nature, by virtue of the decision of Special Bench in Quark Systems P. Ltd (supra), assessee could not be disabled from pleading exclusion of certain comparables only for a reason that it appeared in its own list. 03. Per contra, Ld. DR submitted that the additional grounds sought exclusion of comparable selected by the assessee itself and if admitted, required to be remitted back to the AO. 04. We have perused the orders and heard the rival contentions. In so far as the additional grounds are concerned, in our view, decision of Quark Systems P. Ltd, would go in favour of the assessee. It was held therein that transfer pricing was an evolving area and therefore an assessee, just because it had included certain comparables in its own list, could not be held back from seeking exclusion of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Virtual R&D, Embedded Systems Engineering and Quality Process Consultancy. High end skills, processes, tools, and, methodologies fuel the service offerings. IT Operations: HPGS helps customers in building infrastructure, network management, network deployment, security systems and database management. This group supports over 5.500 products and is geared to meet stringent service level expectations of its customers. HPGS has expertise in the networking arena and the capability to implement and manage technical-assistance centres ('TAC5"), remote management centres ("RMCs") and satallite data centres ("SDCs"). During the financial year 2004-05, HP decided to create a consolidated India based Global Delivery model for IT services. HPGS was made pall of the HP Global Delivery organisation pursuant to this decision. Consequently, HPGS now functions as a contract service provider to HP as opposed to an independent risk bearing entity. HPGS provides the above services to its associated enterprises under a General Services Agreement between FIPGS and HP Co. While providing the above services, HPGS undertakes the following functions: Management Top level management func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP study and had selected 46 comparables through a search done under prowess and capitaline data base. Average PLI of these 46 comparables came to 12.52% and as per assessee, profit margin of 7.46% was falling within + / - 5% of the PLI of the comparables, after adjustment for working capital. TPO while accepting TNMM as the most appropriate method for analysing the international transactions of the assessee, however held that out of the 46 comparables considered by the assessee, 38 were to be rejected for a reason that they either failed criterion like RPT, erevenue filter, on-site revenue filter and functional dissimilarities. Eight comparables accepted out of the list provided by the assessee included Accel Transmatics Ltd (seg), Quintegra Solutions Ltd, Sasken Communication Technologies Ltd (Seg) and Tata Elxsi Ltd (seg), which assessee is now seeking exclusion. TPO thereafter made his own analysis of the data bases mentioned above and zeroed in on 26 comparables including the eight selected from the list of assessee. List of such comparables and their average PLI is given below : Sl. No. Company Name Sales (Rs.cr.) OP to Total Cost% Product sales (Rs.1% of sales) RPT (Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 59.91 95.52% 48.52% 0.39 0.62% 2.02 3.22% 66.68% P 20 R S Software (India) Ltd 101.04 13.47% 0 0.85 0.84% 97.17 96.17% 68.77% 0 0.00% 1.83 1.81% 64.62% P 21 R Systems International Ltd (Seg.) 112.01 15.07% 2.68/2.39% 12.77 11.40% 105.36 94.06% 8.55% 0.63 0.56% 0.93 0.83% 56.32% P 22 Sasken Communication Technologies Ltd (Seg.) 343.57 22.16% 0 3.94 1.15% 262.66 76.45% 21.43% 0 0.00% 22.26 6.48% 57.03% P 23 SIP Technologies & Exports Ltd 3.80 13.90% 0 0 0.00% 3.8 100% 30.96% 0 0.00% 0.04 1.05% 39.92% P 24 Tata Elxsi Ltd (Seg.) 262.58 26.51% 0 3.34 1.27% 252.57 96.19% 22.90% 10.91 4.15% 2.63 1.00% 54.35% P 25 Thirdware Solutions Ltd 36.08 25.12% 0 3.60 9.90% 27.44 76.05% 7.98% 0 0.00% 0.07 0.19% 62.64% P 26 Wipro Ltd (Seg.) 9616.09 33.65% 0 58.26 0.61 98% 54.70% 817.36 8.50% 727.4 4.44% 42.13% C 25.14% 13. On the arithmetic mean PLI of 25.14%, TPO recommended negative working capital adjustment of 1.88% which resulted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd, E-Zest Solutions Ltd,, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Megasoft Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg). Copy of the order of Tribunal in the case of NXP Semi Conductors India P. Ltd (supra) was placed on record. 16. Ld. AR also submitted that though Mega Soft Ltd was considered a good comparable in the case of NXP Semi Conductors India P. Ltd (supra), coordinate bench had directed reworking its segmental results. However, Ld. AR pointed out that the annual report of the said company was prepared on calendar year basis and that too after an amalgamation which happened during the relevant previous year. Thus according to him, Mega Soft Ltd was to be excluded. 17. For seeking exclusion of Flextronics Software Systems Ltd (seg) and Sasken Communication Technologies Ltd (seg), Ld. AR placed reliance on the decision of Delhi Bench of the Tribunal in the case of Motorala Solutions (India) P Ltd v. ACIT [ITA.5637/Del/2011, dt.14.08.2014]. Ld. AR submitted that the said decision was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts should be considered for the comparability analysis. 20. Vis-a-vis Mega Soft Ltd, Ld. DR submitted that the Tribunal decision relied on by the assessee itself had recommended the inclusion of the said company as a good comparable, after segmenting its result. 21. As for R Systems International Ltd (seg), Ld. DR submitted that the decision of Mumbai bench in the case of ACIT v. Hapag Llyod Global Services P. Ltd [ITA.8499/Mum/2010, dt.28.02.2013] (supra) relied on by the assessee was for F. Y. 2005-06. 22. Continuing his arguments, Ld. DR submitted that assessee was seeking exclusion of four of the concerns considered by itself as proper comparables and therefore comparability of these had to be looked into by the AO / TPO for proper analysis. Reliance was placed on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Quark Systems P. Ltd [(2011) 62 DTR 0182]. 23. We have perused the orders and heard the rival contentions. In so far as Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd,, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information System ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." 49. 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 company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should 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." 20. Respectfully following the decision of the Tribunal in similar set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (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. iii) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- * In the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are 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. iv) E-Zest Solutions Ltd. 14.1 This company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed 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 InformationSystems (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. v) Helios & Matheson Information Technology Ltd : 16. The next point made out by the assessee is with r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext 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 not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs. 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e finding of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O 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 provider. We therefore accept the plea of the Assessee that this company is not comparable. x) Persistent Systems Ltd. 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. xi) Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e.Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in thecase of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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." xiv) Wipro Limited 13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg) have to be excluded from the list of comparables. However out of these, M/s. Accel Transmatics Ltd (seg), Quintegra Solutions Ltd and Tata Elxsi Ltd (seg) were a part of assessee's own TP study. Hon'ble Punjab & Haryana High Court in CIT v. Quark Systems India (P) Ltd (supra), upheld the Special Bench decision in DCIT v. Quark Systems (P) Ltd [(2010) 42 DTR 414], noting that latter had only remitted the issue of comparability of comparables considered in assessee's own TP study, back to TPO. Hence we are of the opinion that the issue of comparability of these three companies have to go back to AO / TPO for consideration afresh. However M/s. Avani Cimcon Technologies Ltd, Celestial Lab Ltd, E-Zest Solutions Ltd, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Thirdware Solution Ltd (seg) and Wipro Ltd (seg) have to be excluded by virtue of coordinate bench decision in the case of NXP Semiconductors India Ltd (supra). Comparabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customization was less than 25% of the overall revenues. The TPO therefore held that 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. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its software service segment. The product segment has employee cost of 27.65% whereas the software service segment has employee cost of 50%. Similarly, the profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both the segments are substantially different and therefore comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record, but not, as rightly submitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in ITA No. 5637/D/2011 149 agreement with ld. counsel for the assessee that this company cannot be included as a comparable in the set of comparables selected by ld. TPO on account of clear contradiction between contents of annual report and information obtained u/s 133(6). 27. Rule 10D(3) specifies the information and documents that are to be maintained by a person who is entering into international transactions. These are official publications, published accounts or those which are in public domain except for agreements and contracts to which assessee is privy. Once the annual report of a company is for a year different from the financial year ending 31st March, then without doubt, it will cease to be a good comparable, unless the information received in pursuance to a notice u/s.133(6) of the Act from such company, is reconciled with the figures available in such ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. The Id. DR contended that since the case of CMC Limited has a different financial year ending vis-a-vis that of the assessee, the same ought to have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by the Id. DR in this regard was not seriously challenged by the Id. AR. Respectfully following the precedent, we hold that this case should be excluded from the list of comparables. 30. No doubt the above decision was for A. Y. 2005-06, but the annual report of the said company placed by the assessee at paper book page No.599 show that its final accounts were being prepared on a calendar year basis even after that. Profit and Loss account is for calendar year ending 31.12.2008 for the same reason as mentioned by the coordinate bench of Mumbai in the case of Hapag Lloyd Global Services P. Ltd (supra), we are of the opinion that R Systems International Ltd (seg) could not be considered as a proper compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and, therefore, keeping in view the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables. If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee's own study, then the AO / TPO has to be given a chance for verification, in view of judgment of Hon'ble Pun jab & Haryana High Court in the case of Quark Systems India P. Ltd (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd back to the AO / TPO for consideration afresh as per law. Ordered accordingly. 32. Once the above companies are excluded what would be directly left in the list of comparables and Datamatics Financial Services Ltd (seg), Geometric Software Ltd (seg), iGate Global Solutions Ltd, LGS Global Ltd, Media Soft Solutions P. Ltd, Mindtree Ltd, R S Software (India) Ltd, SIP Technologies & Exports Ltd and Mega Soft Ltd. Last of these, viz Mega Soft Ltd, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ft) 9 Cosmic Global Ltd 4.28 12.40% 0 0.00% 2.72 63.55% 0 0.00% P 10 Datamatics Financial Services Ltd (Seg.) 2.92 5.07% 0.23 7.88% 2.92 100.00% 0.13 4.45% P 11 Eclerx Services Ltd 86.12 89.33% 7.85 9.12% 79.54 92.36% 8.37 9.72% P 12 Flextronic Software Systems Ltd (Seg.) 12.93 8.62% 0 0.00% 10.61 82.06% 0.11 0.85% P Seg 13 Genesys International Corporation Ltd 19.17 13.35% 1.12 5.84% 18.86 98.38% 0.13 0.68% C Seg 14 HCL Comnet Systems & Services Ltd (Seg.) 260.18 44.99% 55.99 21.52% 260.18 100.00% 1.7 0.65% P Seg 15 ICRA Techno Analytics Lts (Seg.) 7.23 12.24% (*)0.17 (*)1.85% (*)7.7 (*)83.64% 0.02 0.28% P (Soft) 16 Informed Technologies India Ltd 4.08 35.56% 0.65 15.93% 4.08 100.00% 0.61 14.95% P 17 Infosys BPO Ltd 649.56 28.78% 48.3 7.44% 608.87 93.74% 41.49 6.39% P 18 I Services India Pvt Ltd 16.29 49.47% 0 0.00% 16.29 100.00% 0.2 1.23% C 19 Maple Esolutions Ltd 12.21 34.05% 0 0.00% 12.21 100.00% 0.02 0.16% P 20 Mold-Tek Technologies Ltd (Seg.) 11.4 113.49% 0.12 1.05% 11.31 99.21% (**)0.85 7.46% P (Seg.) 21 R Systems International Ltd (Seg.) 17. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin. Relying on the decision of Pune Bench of the ITAT in the case of DCIT v. Affinity Express India P. Ltd [ITA No.595/PN/2013, dt.29.04.2015], Ld. AR submitted that the said company had to be excluded from the list of comparables. 38. Vis-a-vis, Eclerx Services Ltd, Infosys BPO Ltd and Mold-Tek Technologies Ltd, Ld. AR submitted that they were into knowledge process outsourcing services and were not comparable with the assessee which was doing technical support services through its call centres. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Rampgreen Solutions P. Ltd v. CIT [ITA.102/2015, dt.10.08.2015], coordinate bench decision in the case of Symphony Marketing Solutions India P. Ltd v. ITO [IT(TP)A No.1316/Bang/2012, dt.14.08.2013], and Delhi Bench decision in the case of iQor India Services P. Ltd v. ITO [ITA.6034/Del/2012, dt.27.04.2015]. Further as per the Ld. AR, Infosys BPO Ltd had to be excluded due to its giant size and ownership of intellectual property. According to him for the very same reason M/s. Wipro Ltd (seg) also had to be excluded from the list of comparables. Reliance was also placed on the decision of Mumbai Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that as far as software development is concerned, the company would require highly skilled employees resulting in high cost of employees, whereas in the ITES which is a 'call centre', it would require only graduates and not very skilled personnel resulting; in low employee cost and, therefore, 'the employee cost filter' cannot be uniformly applied for both the sectors. 35. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation Technology Enabled Services (ITES), it would be appropriate to consider the subsidiary company as comparable in the assessee's case which is also in ITES industry. However, the argument of the assessee that M/s. Bodhtree Consulting Ltd. is not functionally comparable was not accepted by the TPO and was retained as a comparable. 6. The assessee brought to the notice of the Ld.CIT(A) the following paragraph in the Director's report in the annual report of the company: "Bodhtree has only one segment, namely software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies." 7. The assessee also drew the attention of the Ld.CIT(A) to the different parts of the annual report and information provided on the website of the company to contend that M/s. Bodhtree Consulting Ltd. is clearly into software development whereas the assessee company provides ITES, therefore, M/s. Bodhtree Consulting Ltd. cannot be considered as a comparable to the assessee. 8. Based on the arguments advanced by the assessee the Ld.CIT(A) directed the AO to excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the requirement. HPGS has set up telecom infrastructure that is approved by HP and that has the capability of supporting the services and complying with HP's routing norms. Quality check and review Associated enterprises monitor and review the technical call centre services provided by HPGS. They also have certain satisfaction level parameters on the basis of which they undertake quality checks and review the services provided for quality levels. HPGS assists associated enterprises in the quality check and review process. HPGS' Contact Center provides support services to HP's customers worldwide. This center provides remote management, mail-based support, chat-based support and voice-based support to a number of customers. It has an excellent soft-skills and technical training program, as well as world-class infrastructure facilitate and quality support services. During the financial year 2004-05, the HP decided to create a consolidated India based Global Delivery model for IT services. HPGS was made part of the HP Global Delivery organization pursuant to this decision. Consequently, HPGS now functions as a contract service provider to HP as opposed to an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise. Government policy risk Since HPGS operates as a contract service provider to HP, any changes in the US Government policy regarding offshore service providers would affect both the entities. In this respect both HPGS and HP face sufficient risks. The above risks are summarized in the table below: Service liability risk No Yes Market risk No Yes Foreign exchange risk Yes No Credit risk No Yes Capacity utilization risk No Yes Government policy risk Yes Yes The risk profile of the taxpayer vis-a-vis other comparables has been dealt with in detail later in this order under the head "Risk Adjustment" and in the orders passed for the earlier assessment year(s). 45. In our opinion, claim of the assessee that technical services rendered by it to the HP group entities were all of lower end has not been successfully demonstrated by it. It is also true that TPO had not gone deeper into this particular claim of the assessee. No doubt Hon'ble Delhi High Court in the case of Rampgreen Solutions P. Ltd [supra] held that Eclerx Services Ltd was to be excluded from being considered as a comparable to an assessee doing lower end call centre wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance was placed on the decision of the Tribunal in the case Capi tal IQ Informat ion Sys tems ( India) Pvt . Ltd. in ITA No 1 961/Hyd/2011, CRM Se rvi c e s Indi a (P) Ltd . in ITA Ns 4068/(Del)/2009, Avincon India Pvt. Ltd. in ITA No. 1989/Mum/2011 and Market Tools Research Pvt. Ltd. on ITA No. 2066/Hyd/201l. We have perused the decisions relied upon by the Id. Counsel for assessee. We find that whenever a company or its directors are found to be involved in fraud, the co-ordinate Benches have taken a consistent view of excluding such company from the final list of comparables as the financial results are not reliable. Respectfully following this consistent view taken by the Tribunal, we direct the exclusion of this company from the final list of comparables. Since the promoters and directors of these companies were involved in frauds there is much strength in the argument of the Ld. AR that their results were unreliable. However, we find that Maple E Solutions Ltd formed a part of assessee's own TP study. Therefore while we direct exclusion of M/s. Triton Corp Ltd from the list of comparables, the question of exclusion of M/s. Maple E Solution Ltd is remitted back to the AO / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tmental Representative contended that unless the financial year end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in the case of Sandstone Capital Advisors Private Limited v. ACIT in ITA No.6315/Mum/ 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule 10B(4) and an another case of Pune Bench of the Tribunal in Honeywell Automation India Ltd., has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. The ld. DR contended that since the case of CMC Limited has a different financial year ending vis-a-vis that of the assessee, the same ought to have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by the ld. DR in this regard was not seriously challenged by the ld. AR. Respectfully following the precedent, we hold that this case should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s treated as allowed. 55. Vide its grounds 8 and 9 grievance raised by the assessee is that cost of computer software and hardware which were not of enduring nature was still considered as acquisition of capital asset by the lower authorities. Alternatively assessee submits that if these are considered as capital asset then depreciation had to be given. 56. We have heard the rival contentions. Assessee has not been able to establish that computer software and related hardware acquired by it did not give it the benefit of enduring nature. However we are of the opinion that once it was treated as a part of computer, assessee was eligible for depreciation at 60%. Ordered accordingly, Grounds 8 and 9 are treated as partly allowed. 56. Grievance raised by the assessee in its ground 10 is that interest income earned by it was considered as income from other sources rejecting its contention that it was nothing but profits and gains from business or profession. 58. We have heard the Ld. AR. Assessee in our opinion has not been able to show the nexus of its interest income with its business activities. Unless nexus with business is shown by the assessee, interest income will always fall ..... X X X X Extracts X X X X X X X X Extracts X X X X
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