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TMI Blog2016 (8) TMI 1426X X X X Extracts X X X X X X X X Extracts X X X X ..... direct the AO to allow deduction u/s 10A without setting off the domestic losses. Transfer Pricing Adjustment - comparable selection - HELD THAT:- Assessee is engaged in developing, testing and software solution for group companies as well as for marketing services and solution in India for manufacturing and hospitality industry thus companies functionally dissimilar with that of assessee need to be deselected from final list. Applying a fixed slab of turnover gives absurd results of comparability however the Tribunal has taken a view that the turnover in any case can be considered as a parameter / criteria for deciding the comparability but the proper yardstick would be a range of multiples of turnover of the tested party on both sides. Company following different financial year ending on 31.12.2006 - the financial data is not relating to the same period from 1.4.2006 to 31.3.2007. Since the contemporaneous data are not available in respect of this company as provided under Rule 10B(4) of the IT Rules, therefore, we are of the view that this company cannot be considered as a good comparable for want of contemporaneous financial data to be compared with the assessee. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o have been considered based on the decision of the jurisdictional High Court in the case of CIT Vs Tata Elxsi Limited (Karnataka High Court 2011). 3. Total turnover ought to have been determined by adding other turnover if any to the export turnover. Since your appellant has no other turnover, the export turnover should be adopted as the total turnover also. Ground II 4. The Assessing Officer has wrongly adjusted the loss incurred by the non STPI unit of your assessee against the profits earned by the STPI unit in arriving at the amount of deduction allowed u/s 10A although the deduction U/s 10A is to be calculated on the basis of profits and gains derived by the respective STPI undertaking and not on the basis of profits and gains derived by the company as the benefit travels with the undertaking and is not attached to the assessee. 5. The decision of the Hon. Karnataka High Court in the case of CIT Vs. Yokogawa India Limited (ITA 78/2011) is squarely applicable to us. Ground III 6. The addition of ₹ 1,56,60,368/- made as ALP adjustment as suggested by the Transfer Pricing Officer and upheld by the Dispute Resolution Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while disposing off the case of Rolls Royce PLC Vs. DDIT dated January 30th, 2009. He has also adopted a wide variety of companies enjoying margins in the range of 3.66% to 109.79%. This shows that the comparables selected by him are not comparable with each other, leave alone with us. vi) The margins earned by our AEs are much lower than the margins earned by us. This clearly indicates that we have undertaken our transactions with our AEs at arm s length price and have continued to bill our AEs at arm s length price even when they are making lower margins than us even though our profits are tax free u/s.10A of the Income Tax Act, 1961. Hence you will be fully satisfied that there is no attempt to transfer profits to another tax jurisdiction. The CBDT in their Circular No.14 of 2001 (252 ITR ST.65) in Para 55.5 in Page no.104 has stated the following as the purpose behind introducing Transfer Pricing Regulations in Indian Tax Laws: Para 55.5 - The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le High Court reads as follows:- ..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define total turnover , the word total turnover falls for interpretation by this Court; ..In section 10A, not only the word total turnover is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in interpreting section 10A when the principle underlying both these provisions is one and the same . In the light of the above binding precedent, we direct the Assessing Officer/TPO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while computing deduction u/s 10A of the Act. 4. Ground Nos.4 5 are regarding allowing the deduction under Section 10A without setting off of loss incurred by the non-STPI unit. 4.1 The learned AR of the assessee has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Yokogawa India Ltd. others (341 ITR 385) as well as the decision in the case of CIT vs. M/s.Auringene Discovery Technologies Ltd. in ITA No.549/2013 dated 05/09/2014 and submitted that the Hon ble High Court has reiterated the view taken in the case of Yokogawa India Ltd.(supra). He has also relied upon the decision of this Tribunal dated 30/4/2014 in the case of CIT vs. M/s.Biocon Ltd. in ITA Nos.248, 368 to 371 1206/2010. 4.2 On the other hand, learned Departmental Representative has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. The Parliament despite being conversant with the implications of this chapter, has consciously chosen to retain s. 10A in Chapter III. 17. If s. 10A is to be given effect to as a deduction from the total income as defined in s. 2(45), it would mean that s. 10A is to be considered after Chapter VI-A deductions have been exhausted. The deductions under Chapter VI-A are to be given from out of the gross total income. The term gross total income is defined in s. 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not include s. 10A. In other words, the gross total income would be arrived at after considering s. 10A deduction also. Therefore, it would be inappropriate to conclude that s. 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted. 18. It is after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this subsection with retrospective effect from 1st April, 2001 by lifting the embargo in the aforesaid clauses in respect of depreciation and business loss relating to the asst. yr. 2001-02 onwards. The amendment indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post tax holiday. This is supported by Circular No. 7 of 2003 [(2003) 184 CTR (St) 33] wherein the board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dt. 5th Sept., 2003 reads as under : 20. Providing for carry forward of business losses and unabsorbed depreciation to units in Special Economic Zones and 100 per cent export oriented units. 20.1 Under the existing provisions of ss. 10A and 10B, the undertakings operating in a Special Economic Zone (under s. 10A) and 100 per cent export oriented units (under s. 10B) are not permitted to carry forward their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 10B of the Act viz., CMZ Unit, SAP Unit, RHI Unit and IFP Unit. The assessee had claimed deduction u/s. 10B of the Act in respect of the aforesaid units totaling ₹ 157,22,33,066 which is the sum total of deduction u/s. 10B for the four units as follows:- (1) CMZ Unit : 6,87,70,229 (2) SAP Unit : 76,60,29,880 (3) RHI Unit : 52,42,56,278 (4) IFP Unit : 21,31,76,679 Total 157,22,33,066 The assessee had non-10B units as well. In those non-10B units, there was a loss of ₹ 105,92,19,172. In the return of income filed by the assessee, the assessee sought to carry forward the loss of non-10B units for set off against the profits of non-10B units in the subsequent assessment years. The AO firstly noticed that there was income from other sources to the extent of ₹ 4,71,15,896 and such had to be set off against the loss of the non-10B units. Accordingly, the AO held that the loss of the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. v. ITO, 306 ITR 286 (AT), wherein the provisions of section 10A and 10B have been held to be deduction provisions and not exemption provisions. For all the above reasons, the CIT(Appeals) confirmed the order of the Assessing Officer. Against the order of the CIT(A), the Assessee was in appeal before the Tribunal. 25. This Tribunal dealt with the issue in the following words : 63. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. This issue has already been settled by the Hon ble Karnataka High Court in the case of Yokogawa India Ltd. (supra). The Hon ble Karnataka High Court in the case of Yokogawa (supra) had to deal with two substantial question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee. 66. We may also observe that the Hon ble Karnataka High Court s decision in the case of Himatasingike Seide (supra) has held that unabsorbed depreciation (and business loss) of same (s. 10A/10B) unit brought forward from earlier years have to be set off against the profits before computing exempt profits. The assessee in that case set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred exemption for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a commercial basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the order of the CIT. On appeal by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that CBDT circular No.7 dated 16.07.2013, on the facts and circumstances of the present case is not a benevolent circular vis- vis, the assessee, and therefore the decision to the contrary of the Hon'ble Karnataka High Court in the case of Yokogawa India (supra) will continue to apply. For the reasons given above, we direct the Assessing Officer to accept the claim of the assessee, as raised in ground no.21. 4.5 Accordingly by following the latest judgment of the Hon'ble jurisdictional High Court based on the substituted/amended provisions of sec.10A/10B which are applicable in the case of the assessee as well as the decision of the Tribunal in case of Biocon (supra), we decide this issue in favour of the assessee and direct the AO to allow deduction u/s 10A without setting off the domestic losses. 5. Ground No.6 is regarding Transfer Pricing Adjustment. 5.1 The assessee is engaged in developing, testing and software solution for group companies as well as for marketing services and solution in India for manufacturing and hospitality industry. During the year under consideration the assessee has carried on its business of off shore software development service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h an average PLI 4.31% and accordingly claimed its international transactions at Arm s Length. There is no dispute regarding Transactional Net Margin Method ( TNMM ) accepted as Most Appropriate Method ( MAM ) as it was accepted in the earlier year by this Tribunal. The TPO rejected 19 out of 24 companies selected by the assessee and added 21 more companies by carrying out fresh search. Thus the TPO has considered total 26 comparable companies to determine the Arm s Length Price ( ALP ) as under : Sl.No. Company Name Op to Total Cost % 1 Accel Transmatic Ltd. (Seg.) 21.11 2 Avani Cimcon Technologies Ltd. 52.59 3 Celestial Labs Ltd. 58.35 4 Datamatics Ltd. 1.38 5 E-Zest Solutions Ltd. 36.12 6 Flextronics Software Systems Ltd. (Seg.) 25.31 7 Geometric Ltd. (Seg.) 10.71 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and VPL Software Limited which were rejected by the TPO. We will deal with the issue of functional comparability and inclusion of these three companies as under : (i) Genysis International Corporation Ltd. (a) The learned Authorised Representative of the assessee has submitted that the TPO has rejected this company on the ground of functionally different whereas this company has been designing and developing complex location based solution for enterprises, government and consumers. Hence this company is functionally comparable to the assessee. (b) On the other hand, the learned Departmental Representative has relied upon the orders of the TPO as well as DRP and submitted that this company is deriving income from software development services as well as ITES and no separate segmental results are available. (c) Having considered the rival submissions and relevant material on record, we note that the TPO has rejected this company by citing the reason that this company s entire revenue is from GIS which is in the nature of ITES and it is functionally different. This fact recorded by the TPO has not disputed by the learned Authorised Representative of the assessee that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even the information sought under Section 133(6) of the Act was not submitted by the company. Thus in the absence of any relevant information including the RPT, the TPO has rejected this company. c) We have considered the rival submissions as well as the relevant material on record. The reason for rejecting this company are recorded by the TPO at pages 41 42 of the impugned order as under : Annual Report is not available for the FY 2006-07. RPT Information is not available. 133(6) notice was issued. The company did not submit information. Thus the company is not considered as a comparable. It is clear from the above reasons recorded by the TPO that the Annual Report of this company is not available for the year under consideration and further the notice issued under Section 133(6) of the Act was also not responded by the company to submit the information. Therefore, there was no information available regarding the basic facts and revenue details of this company. The assessee has not filed any record before us even the Annual Report of this company is not available. Accordingly, we do not find any merit or substance in the objections raised by the assessee against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally 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. By following the above decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee who was rendering software development services only and it was held as follows:- 7.8 Avani Cincom Technologies Ltd. ( Avani Cincom ): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icals 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 manufacturing and hospitality industries. This also explains the huge operating margin of 58.59% to cost. This company ought to be rejected on the ground that it is a pure R D Company and therefore, functionally very different from the appellant. In support of his contention he has relied upon the decisions of - i) Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii) Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 9.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 9.2 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-ordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 TPO has relied on the response from this company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or determining the ALP. iv) Persistent Systems Ltd. v) e-Zest Solutions Ltd. vi) Thirdware Software Solutions Ltd. 10. The learned Authorised Representative of the assessee has submitted that the TPO has rejected this company for the Assessment Year 2006-07 on the ground that it has merged with the foreign parent company Thirdware ING . Thus it cannot be considered as a comparable in view of restructuring as well as extraordinary event like merger in the financial year. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of Serial Innovations India Pvt. Ltd. (supra). 10.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that these companies are functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 10.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of these companies have been considered by the co-ordinate bench of this Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the coordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement 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., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out 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. 17. 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai 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. 18. Quintegra Solutions Ltd .. 28. 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 these companies from the list of comparable for determining the ALP. vii) Flextronics Software Systems Ltd. (Seg.) 11. The learned Authorised Representative of the assessee has submitted that this company is having a high turnover as incomparable to the assessee. Therefore this company enjoys economy of scale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the TPO at Sl.No.8 of the final list of comparable viz., M/s.Helios Matheson Information Technology Ltd., we find that the said company has been held to be not comparable with a software service provider like the Assessee by the ITAT Pune Bench in the case of PTC Software (India)Pvt.Ltd. ITA.No.1605/PN/2011 (Asstt. Year : 2007-08) order dated 30.4.2013. The following were the relevant observations of the Tribunal: 16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and also satisfies all the filters applied by the TPO. 13.2 We have considered the rival submissions as well as the relevant material on record. We find that the comparability of this company was not an issue before this Tribunal in the cases relied upon by the assessee as above. Accordingly, we do not find any substance or merit in the argument of the assessee that because of the turnover filter of this company should be excluded from the list of comparables. x) Ishir Infotech Ltd. 14. The learned Authorised Representative of the assessee has submitted that the employees cost of this company is only 3.96% of sales. Hence this company fails the employee cost filter fixed by the TPO at 25%. He has referred to the Annual Report and submitted that the annual accounts of this company shows that employee cost shows at ₹ 29.35 lakhs as per Schedule 15 and operating revenue of this as per Schedule 12 of the Balance Sheet of ₹ 7,42,00,000. Therefore the employee cost is only 3.96% of the turnover. In support of his contention he has relied upon the decision of Serial Innovations India Pvt. Ltd. Vs. DCIT (supra). 14.1 On the other hand, the learned Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. xi) KALS Information Systems Ltd. (Seg.) 15. The learned Authorised Representative of the assessee has submitted that this company is engaged in the development of software and software products. The activity of this company consists of training centre engaged in the training of software professional on online process. Therefore this company cannot be considered as functionally comparable with the assessee. In support of his contention he has relied upon the decisions of - i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 15.1 On the other hand, the learned Departmental Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be rejected as a comparable. 47. 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 provider. We therefore accept the plea of the Assessee that this company is not 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. xii) Megasoft Ltd. 16. The learned Authorised Representative of the assessee has submitted that this company has two divisions i.e. Blue Alloy Division and which is an offshore and online consulting Division and XIUS BCGI Division which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 17.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 17.2 We have considered the rival submissions as well as the relevant material on record. We find that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in Trilogy E-Business Software India Pvt. Ltd. (supra) in paras 32 33 as under : 32. We have considered the rival submissions. First we will consider the submission of the Assessee that companies with abnormal margins should not be regarded as comparable. In the case of Quark Systems Pvt. Ltd. (supra) , the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows: Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in a series of decisions wherein it was held that applying a fixed slab of turnover gives absurd results of comparability however the Tribunal has taken a view that the turnover in any case can be considered as a parameter / criteria for deciding the comparability but the proper yardstick would be a range of multiples of turnover of the tested party on both sides. xiv) R S System International Ltd. (Seg.) 18. The learned Authorised Representative has submitted that this company is following a different financial year ending on 31.12.2006. Therefore, the financial data is not relating to the same period from 1.4.2006 to 31.3.2007. Hence, this company cannot be compared with the assessee. 18.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 18.2 We have considered the rival submissions as well as the relevant material on record. The main objection of the assessee against this company is that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Datamatics. The case of Datamatics is like that of Imercius Technologies representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal. The above observations of the special Bench is a pointer to the fact that where there are extraordinary profits and those companies are considered by the TPO for comparability but loss making companies are not considered as comparable, that would improper. The Tribunal found that such contradiction in approach should not be permitted. Similarly in the case of M/S. Sap Labs India Pvt. Ltd. 2010-TII- 44-ITAT Bang-TP had observed as follows: 86. At the cost of repetition, we have to say that extreme cases should not be included in samples and extreme comparables mean not only the positive higher side but also the lower side. In the list of 22 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparable companies chosen by the TPO viz., M/S.Infosys Technologies Limited, Tata Elxsi Ltd. (Seg.) Wipro Limited are concerned, this Tribunal in the case of M/S. Curam Software International Pvt.Ltd. Vs. ITO ITA No.1280/Bang/2012 for AY 08-09 order dated 31.7.2013 has held that the aforesaid companies are not comparable companies in the case of software development services provider. The following were the relevant observations in the case of M/S.Curam Software International Pvt. Ltd.(supra): 12. (4) Infosys Technologies Ltd. 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO s own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- . Tata Elxsi is engaged in development of niche product and development servic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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