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TMI Blog2016 (2) TMI 1163X X X X Extracts X X X X X X X X Extracts X X X X ..... l Member And Inturi Rama Rao, Accountant Member P.K. Prasad, CA for the Appellant. P.K. Sri Hari, Addl. CIT (DR) for the Respondent. ORDER Vijaypal Rao, Judicial Member - These cross appeals are directed against the order dated 31.12.2012 of Commissioner of Income Tax (Appeals)-IV, Bangalore for the Assessment Year 2007-08. The assessee has raised the following grounds in its appeal: "The grounds taken by the Appellant are without prejudice to one another. 1. That the order passed by the learned Commissioner of Income Tax (Appeals) - IV, Bangalore ('CIT (Appeals)'), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2. That the learned CIT (Appeals) erred in upholding the rejection of Transfer Pricing ('TP') documentation by the learned Transfer Pricing Officer ('TPO')/Assessing Officer ('AO') and in making an adjustment to the transfer price of the Appellant in respect of its software development services by ₹ 76,95,410 and in the information technology enabled services by ₹ 20,31,990. 3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in; (a) Upho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The financial results reported by the assessee are as under :- Description Software Development Services IT enables Services (Rs.) Amount (Rs.) Operating Revenue ₹ 18,28,00,964/- 8,66,47,650/- 26,94,48,614/- Operating Cost ₹ 16,10,69,406/- 7,30,18,028/- 23,40,87,434/- Operating Profit (PBIT) ₹ 2,17,31,558/- 3,53,61,181/- 3,53,61,180/- Operating Profit to Cost Ratio 13% 19% 3. The assessee has reported international transactions in these two segments as under :- 1. Contract Software Development Services ₹ 18,28,00,964/- Readjustment done by TPO 2. IT enabled Services ₹ 8,66,47,650/- Readjustment done by TPO 4. The assessee in its T.P. analysis has bench marked its international transactions by adopting Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) and operating profit to total cost (OP/TC) as Profit Level Indicator (PLI). First we will take up the software development services segment. 5. The assessee selected 18 comparables for bench marking its international transactions and arrived at Mean Margin of 11.30% as under : Sl. No Comparable Company Without Adjs. Markup on Total Cost 1. Bodhtree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AM of the comparables after working capital adjustment at 22.19% in comparison to the assessee's operating margin at 13%. Thus the TPO proposed to make an upward adjustment of ₹ 1,39,53,888. The Assessing Officer made the corresponding addition on account of TP adjustment as proposed by the TPO while passing the assessment order. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) and raised the objections against the companies selected by the TPO as comparable in respect of the international transactions pertain to software development services segment. The CIT (Appeals) excluded 23 companies from the set of comparable companies selected by the TPO and retain only 3 companies which are as under :- Sl.No. Company Name OP to Total Cost % (before working capital adjustment) OP to Total Cost % (after working capital adjustment) 1. E-Zest Solutions Ltd. 36.12 35.0535.05 2. KALS Information Systems Ltd. (Seg.) 30.55 22.47 3. Lucid Software Ltd. 19.37 16.11 Mean Margin After Working Capital Adjustment 73.63/3 24.54 7. Thus the CIT (Appeals) has deleted/excluded all the companies selected by the TPO against which the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication of this issue in a series of decisions of this Tribunal, a commonly accepted tolerance range of 5% to 25% of total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case of the assessee before us, the assessee itself has selected 18 comparables and the TPO/A.O. selected 26 comparables. Therefore, the availability of the comparables of the international transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnologies India (P.) Ltd. v. Asstt. DIT [2014] 149 ITD 323/44 taxmann.com 296 (Delhi - Trib.) CSR India (P.) Ltd. v. ITO [2013] 31 taxmann.com 265 (Bang. - Trib.) 10.1.2 On the other hand, the learned Departmental Representative has submitted that the CIT (Appeals) has not examined the functional comparability of this company and rejected the same/excluded the same by applying 0% RPT filter. He has relied upon the finding of the TPO and submitted that the TPO has examined the functional comparability of this company and the assessee did not dispute before the TPO or before the CIT (Appeals). 10.1.3 We have considered the rival submissions as well as relevant material available on record. Therefore, this company cannot be excluded from the list of comparables. There is no dispute that the assessee did not object this company as comparable by the TPO. Even before the CIT (Appeals) the assessee did not raise any objection for inclusion of this company. However, the CIT (Appeals) has excluded this company by applying 0% RPT filter. Thus the revenue is aggrieved by the order of the CIT (Appeals) on the issue of applying 0% RPT filter. As regards the functional comparability of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the Annual Report of this company as well as the auditor's report, we find that this company is a software service provider and does not require to hold inventories as clearly reported by the auditor of the assessee. Further this company has received the revenue of ₹ 3,54,77,523 as earning in foreign exchange of software export services. From the profit and loss account, this company has reported only one source of income from operations and that is export in foreign currency. Apart from this revenue, only a minor amount has been shown from the interest in the profit and loss account. Further, we find that there is no other revenue generating source during the year under consideration. Therefore, we find from the Annual Report of the company, there is one segment i.e. software exports. Thus the contention of the assessee is that this company is in the diversified activity is not found support from the record and therefore it is contrary to the record. The decisions relied upon by the assessee also does not give any finding of fact on functional dissimilarity but the earlier order of the Tribunal in some other cases has been followed in these decisions. There is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities and is not engaged in R&D activities is bad in law. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma (P.) Ltd. v. Addl. CIT [IT Appeal No. 6623 (Mum.) of 2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment was examined. 10.3.1 It was submitted by Ld A R of the assessee that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. Thus this company cannot be considered as a comparable of assessee for the reason that this company has diverse business and this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 10.3.2 On the other hand Ld D R has relied upon the order of the TPO and submitted that this company has been classified as software development company and therefore the main activity is similar to that of assessee. 10.3.3 We have considered the rival submissions as wellas relevant material on record. The business activities of this company has been examined and analysed by the Mumbai Bench of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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.' " Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. Having regard to the above facts and circumstances as well as the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma (P.) Ltd. (supra) we are of the view that this company was basically in clinical research and manufacture of bio products and other products and therefore, this company cannot not be considered as good comparable of assessee. 10.4 Datamatrics Ltd. : This company is not disputed or contested by any of the parties though the CIT (Appeals) has deleted this company from the list of comparables on the ground of related party transactions. We find that the revenue from RPT of this company is 13.1% and therefore it is much below the threshold of 15% as discussed in the foregoing paragraphs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are into product development has directed excluding these companies for comparability analysis. Respectfully following the decision of the co-ordinate bench of this Tribunal incase of M/s. Intoto Software India Pvt. Ltd. (supra) we also direct the Assessing Officer/TPO to exclude both these companies." It has been brought to our notice that the finding of the Tribunal in case of DE Shaw India Software Pvt. Ltd. has been upheld by the Hon'ble High Court. By following the decision of the coordinate Bench at Hyderabad as well as Hon'ble High Court, we direct the TPO/A.O. to exclude this company from the list of comparables for determining the ALP. 10.7.1 Geometric Ltd. (Seg.) : The assessee objected the inclusion of this company before the TPO. The CIT (Appeals) excluded this company from the set of comparables on the ground of RPT filter. 10.7.2 We have heard the rival submissions and considered the material on record. It is not disputed that the Related Party revenue is 19.98% of total sale of this company. Therefore, this company fails the filter of threshold limit of 15% RPT. Accordingly, we do not find any reason to interfere with the finding of the CIT (App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. The functional comparability of this company has been examined by the Delhi Bench of this Tribunal in case of Agnity India Technologies (P.) Ltd. (supra) and the finding of the Tribunal has been upheld by the Hon'ble Delhi High Court that this company cannot be compared with an ordinary entity because of the scale of operations and brand value. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. Accordingly we direct the TPO/AO to exclude this company from the list of comparables for determining the ALP. It is ordered accordingly. 10.10.1 Ishir Infotech Ltd. : The assessee objected to the inclusion of this company on the ground of RPT at 22%. The CIT (Appeals) excluded from the list of comparables by applying the filter of RPT. 10.10.2 We have heard the learned Authorised Representative as well as learned Departmental Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt. Ltd. (supra): "(d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India (P.) Ltd. v. Dy. CIT IT Appeal No 1386/PN/2010 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)-training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the inclusion of this company in the list of comparables on the ground of functional dis-similarity. The CIT (Appeals) has confirmed the inclusion of this company in the list of comparables and rejected the contention of the assessee. 10.13.2 Before us, the learned Authorised Representative has submitted that this company is a software product company. The company has debited the expenditure to the profit and loss account as work in progress. Further, this company has employed about 30% of total capital in product development expenditure as per the balance sheet. The learned Authorised Representative has pointed out that the Tribunal in assessee's own case for the Assessment Year 2006-07 has excluded this company from the list of comparables. He has relied upon the following decisions : Cases pertaining to Asst. year : 2007-08 Cases pertaining to other Asst. years CSR India (P.) Ltd. (supra) Ariba Technologies India (P.) Ltd. (supra) DE Shaw India Software (P.) Ltd. (supra). This Tribunal ruling has been upheld by the high court for the State of Telangana and Andhra Pradesh - ITTA No. 433 of 2014 dated 22 July 2014 Huawei Technologies India (P.) Ltd. (supra) 10.13.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee. ** ** ** 15. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Logica Private Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Logica Pvt. Ltd. (supra), we direct that the company viz., Lucid Software be excluded from the list of 20 comparable arrived at by the TPO." Similar view has been taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '26. As far as Sl. No. 24 viz., Megasoft Ltd. of the list of comparables chosen by the TPO given in the chart at para-12 of this order is concerned, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) had held that only segmental data should be taken for the purpose of comparison. Following are the relevant observations of the Tribunal:- "37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that 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-BC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services." 27. In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison.' In view of the decision of the co-ordinate bench of this Tribunal, we hold that the segmental margins of this company relating to providing software services are comparable to the assessee's software development service segment and therefore we direct the A.O./TPO to consider only segmental data relating to providing software services of this company i.e. Megasoft Ltd. 10.16 Mindtree Consulting Ltd. : The assessee has not objected to this company to be included in the list of comparables. The CIT (Appeals) has excluded this company from the list of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. 10.20.1 Tata Elxsi Ltd. (Seg.) : The assessee objected the inclusion of this company in the list of comparables on the ground of R&D filter as well as functional dis-similarity. The CIT (Appeals) has excluded this company on all three grounds of RPT filter as well as functional dis-similarity. 10.20.2 The learned Authorised Representative of the assessee has submitted that this company is engaged in diversified activities including embedded product design services, industrial design and engineering, animation and visual effects, and system integration services. This company is having unique IP portfolio comprising re-usable software components and ready-to- deploy product frameworks. Further this company is engaged in R&D activities resulting in certain IPRs. He has further submitted that the functional comparability of this company has been examined by this Tribunal in assessee's own case for Assessment Year 2006-07. He has relied upon the following decisions : Cases pertaining to Asst. year : 2007-08 Cases pertaining to other Asstt. years Systech Integrators India (P.) Ltd. v. ITO [2014] 44 taxmann.com 324 (Bang. - Trib.). Ariba Technologies India (P.) Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl. No. 6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl. No. 24 viz., Tata Elxsi Ltd. should be rejected as a comparable." 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO.' In view of the above facts, we direct the A.O/TPO to exclude this company from the list of comparables. 10.21.1 Thirdware Solutions Ltd. : This company was selected by the TPO and included in the list of comparables for the purpose of computing the ALP. The assessee did not contest inclusion of this company in the list of comparables before the TPO as well as before the CIT (Appeals). However, the CIT(A) excluded the company from the list of comparables. assessee is seeking exclusion of this company from the list of comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.22.3 On the other hand, learned Departmental Representative has submitted that when the TPO has considered ITES segment of this segment than the other activity of this company are not relevant for determining the ALP. Thus he has submitted that this company is engaged in the similar activities and therefore is a good comparable. He has relied upon the order of the TPO. 10.23.4 We have considered the rival submissions and the relevant material on record. The assessee objected to the inclusion of this company in the list of comparables on the ground that it fails the R&D filter as well as the functional dis-similarity. The CIT (Appeals) excluded this company from the list of comparables as it was found functionally dissimilar to the assessee. There is no dispute that this company is having significant investment in acquiring new business and also engaged in the R&D activities. Therefore this company is having huge brand value as well as bargaining power in comparison to the other companies who are engaged in the software services providing activity. The comparability of this company was also considered by the Hon'ble Delhi High Court in the case of Agnity India Technology Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable Company Without Adjs. Mark up on Total Cost (after WC) % Cosmic Global Ltd. 9.64 Maple Esolutions Ltd. 29.16 Aditya Birla Minacs Worlwide Ltd (Earlier Transworks Information Services Ltd.) 10.32 Triton Corp Ltd. 25.07 Before the TPO/A.O., the assessee has also submitted the additional comparables as under :- Sl. No. Comparable Company Without Adjs. Mark up on Total Cost (after WC) % 1. Cameo Corporate Services Ltd. -- 2. Sparsh BPO Services Ltd. -- 3. Nittany Outsourcing Services Ltd. -- Out of these additional comparables submitted by the assessee, the TPO accepted the only one namely Nittany Outsourcing Services Pvt. Ltd. The TPO carried out fresh search and selected 27 companies in the set of comparables inclusive of three in the original set of comparables selected by the assessee and one from the additional comparables submitted before the TPO by the assessee. The set of comparables selected by the TPO are as under :- Sl. No. Comparable Company Name OP to Total Cost % as per TP Order OP to Total Cost % after exclusions of comparables as urged before ITAT 1. Accentia Technologies Limited 25.43 25.43 2. Aditya Birla Minacs Worldwide Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion of the 18 comparables on the ground of RPT filter, we have already discussed this issue while dealing with software development services segment and therefore in view of our finding that 15% RPT is appropriate in the case of the assessee. The companies which are included in the set of comparables and having upto 15% revenue from RPT are required to be examined on other grounds including functional comparability. The CIT (Appeals) has retained 8 comparables which are as under :- Sl. No. Company Name OP to Total Cost % (before working capital adjustment) OP to Total Cost % (after working capital adjustment) 1. Accentia Technologies Ltd. (Seg.) 30.61 25.43 2. Apex Knowledge Solutions Pvt. Ltd. 12.83 12.38 3. Bodhtree Consulting Ltd. (Seg.) 29.58 28.86 4. Cosmic Global Ltd. 12.40 10.70 5. IServices India Pvt. Ltd. 49.47 47.80 6. Maple Esolutions Ltd. 34.05 29.48 7. Triton Corp Ltd. 34.93 26.93 8. Vishal Information Technologies Ltd. 51,19 41.57 14. Accordingly, the mean margin was reworked by the CIT(A) after capital adjustment at 27.89%. Thus both the assessee as well as the revenue are aggrieved by the order of the CIT (Appeals) and filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . : This company was selected by the TPO/A.O though the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on turnover filter. We find that the RPT revenue of this company is 15.76%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (vii) Bodhtree Consulting Ltd (Seg.) : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparable on the ground that there is extra-ordinary profit as well as extra-ordinary event in this company during the year under consideration. Further, the assessee also contended that the RPT revenue of this company is at 38.54% and therefore this company fails the RPT filter. The CIT (Appeals) retained this company in the list of comparables. Before us the learned Authorised Representative of the assessee has reiterated its contention and submitted that there is an extra-ordinary profit of this company during the year and further the RPT fails the filter applied by the TPO/A.O as well as CIT (Appeals). H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said company to be considered as RPT for the purpose of uncontrolled comparable price. Accordingly, we do not find any merit in the objections of the assessee, even on the ground of RPT. (viii) Caliber Paint Business Solutions : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparables on the ground that it has 23% revenue from RPT and further this company is engaged in R&D activity and also functionally different. The CIT (Appeals) excluded this company on the ground of 0% RPT filter as this company was stated to have 13.69% RPT. Before us, the learned Authorised Representative of the assessee has submitted that this company fails the RPT filter of more than 15% as this company has shown/reported 23% RPT. Therefore, this company should be excluded from the list of comparables. On the other hand, the learned Departmental Representative has submitted that the CIT (Appeals) as well as the TPO/A.O has reported only 13.69% RPT and therefore this company does not fail the filter of 15% RPT. We have considered the rival submissions as well as the relevant material on record. We note that the TPO/A.O as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. Asstt. CIT [2014] 147 ITD 83/43 taxmann.com 100 and submitted that this company is rendering highly skilled services and cannot be compared with the service of ITES and accordingly, this company should be deleted from the set of comparables. On the other hand, the ld. DR has relied upon the orders of authorities below and submitted that the TPO has considered the functional comparability at the time of selecting this company. We have considered the rival submissions and relevant record. At the out set, we note that the comparability of M/s Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India ) (P.) Ltd. (supra) in para 82 and 83 as under : "82. In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany provides data analysis and data process solution and is recognised as experts in chosen market financial services, retail and manufacturing. It was found to have being providing complete business solutions. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the software development services. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables. (xii) Flextronics Software : This company was selected by the TPO/A.O. However, the assessee objected the inclusion of this company in the list of comparable as it fails R&D filter and also having ITES segment. The CIT (Appeals) excluded this company by accepting the contention of the assessee on R&D filter as well as ITES segment. We have heard the learned Departmental Representative as well as learned Authorised Representative. Ld. D R has relied upon the order of the TPO/A.O and submitted that the TPO has examined the the functional similarity of this company. At the outset, we note that the functional comparability of this company has been examined by this Tribunal in a number of decisions. The learned Authorised Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce range this company having RPT at 1.85% is restored back to the set of comparables. (xvi) Informed Technologies Ltd. : This company was selected by the TPO/A.O and the assessee did not contest the inclusion of this company either before the TPO/A.O or before the CIT (Appeals). However, the CIT (Appeals) excluded this company on RPT filter. We find that the RPT revenue of this company is 15.93%. Therefore this company fails RPT filter of 15% and accordingly, we upheld the exclusion of this company from the list of comparables. (xvii) Infosys BPO Ltd. : This company was selected by the TPO and included in the list of comparables. The assessee objected against inclusion of this company in the set of comparables before the CIT (Appeals) on the ground of functional dis-similarity. The CIT (Appeals) has excluded this company on the ground of 0% RPT filter. Before us, the learned Authorised Representative of the assessee has submitted that the assessee had opposed inclusion of this comparable before the TPO on the ground that this company has substantial intangible assets, profits earned predominantly due to brand value and has large focus on R&D apart from substantial selling and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as the relevant material on record. The contention of the ld. A.R. of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that 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 (developing 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied TPO's filter of more than 75% of revenues from software development services. Thus it was found that this company is functionally dis-similar to the ITES service provider company as it provides end to end solutions in technical consultancy, design, development, re-engineering, maintenance, system integration and implementation. This company also generates revenue from the software products and has huge intangible assets. In view of the above facts and circumstances as discussed above, this company is functionally not comparable with that of the assessee. Accordingly, we direct the A.O./TPO to exclude this company. A similar view has been taken by the co-ordinate benches of this Tribunal in the cases relied upon by the assessee and cited supra. (xviii) I Services India Ltd. : This company was selected by the TPO/A.O and assessee did not contest the inclusion of this company in the list of comparables. Even before the CIT (Appeals) as well as before this Tribunal, the assessee has not contested against the inclusion of this company. The CIT (Appeals) has retained this company as a good comparable. Therefore no specific adjudication or finding was sought in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of Maersk Globle Solution (supra) and it was held that this company cannot be compared with an ordinary ITES. The assessee before us is providing only back office support to the parent company. Therefore, Mold-tek Technology is engaged in producing design, drawing and structural engineering drawings of 2D and 3D software cannot be compared with the assessee. Accordingly, we do not find any reason to interfere with the order of the CIT (Appeals) in treating this company functionally different. A similar view has been taken by the co-ordinate bench of this Tribunal in the case relied upon by the assessee. (xxi) R Systems International Ltd. (Seg.) : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT(A) even not before this Tribunal. However, the CIT (Appeals) excluded this company by applying 0% RPT filter. In view of our finding of proper RPT tolerance range at 15%, this company having 0.58 % of RPT is restored back to the set of comparables. (xxii) Spanco Systems Ltd. : This company was selected by the TPO/A.O but was not objected by the assessee either before the TPO/A.O or before the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the orders of the authorities below and submitted that as far as the functions of this company is concerned, it is very much similar to that of the assessee in providing ITES services. We have heard the rival submissions and the relevant material on record. We find that salary and wages expenditure of this company is very minimal at 2.3% of total revenue which shows that this company outsources the services to third parties. This fact is also reflected in the Annual Report and profit and loss account wherein the job work expenditure is substantial under the head 'Data Entry Charges' and vendor payment. Therefore, there is no dispute as regards the business model of this company is not different from the Assessment Year 2006-07 and 2007-08. Rather the outsourcing service charges are increased during the year to ₹ 13,12,00,000 from ₹ 11,49,00,000 in the earlier year. This Tribunal in the assessee's own case for Assessment Year 2006-07 has held in paras 24 to 25 as under : "24. We have considered the rival submissions. As far as comparable companies chosen by the TPO at S.No.1,3,6,7 & 8 viz., Maple ESolution Ltd., Datamatics Financial Services Ltd., Vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technology Ltd.) was not a suitable comparable and needs to be dropped from the final set of comparables. Based on the above submissions, it was submitted that this company cannot be used as a comparable and has to be excluded. 9.1. The learned Departmental Representative, however relied on the orders of the TPO. 9.2. After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee's own case in the later year, as can be seen from the copy of the order placed on record, for assessment year 2008-09. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company are not relevant for determining the ALP. Thus he has submitted that this company is engaged in the similar activities and therefore is a good comparable. He has relied upon the order of the TPO. We have considered the rival submissions and the relevant material on record. Though the TPO has considered only segmental data relating to ITES services, however, there is no denial that this company is having significant investment in the business acquisition as well as engaged in the innovation activities of various fields including technology innovation, process innovation and delivery innovation. This company is also having a huge brand value and therefore has a bargaining power in comparison to the other companies who were engaged in the back office support services. This company is also maintaining 55 centres of excellence and 30 innovation projects. Therefore this company is also engaged in the R&D activities and getting the benefit of the innovation and R&D. In view of the above facts, this company cannot be treated as a good comparable for the assessee which is providing back office support services to its parent company without earning any benefit of the innovation an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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