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TMI Blog2017 (5) TMI 1700X X X X Extracts X X X X X X X X Extracts X X X X ..... r short 'the Act'] by the Asst. Commissioner of Income-tax Circle 12(1),'Bengaluru, [for short "AG'] for the assessment year 2007-08. 2. The assessee-company raised the following grounds of appeal: The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under: 1. Assessment and reference to Transfer Pricing Officer are bad in law (a) The final assessment order issued by the Assistant Commissioner of Income-tax, Circle-12(l), Bangalore ['AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the final assessment order issued by the learned AO is bad in law insofar as the fact that the AO did not issue to Mphasis Limited ('the Appellant or 'the Company'), a show-cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. (b) The AO has erred in making a reference to the Additional Commissioner of Income-tax -Transfer Pricing - II, ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies based on their financial results without considering the functional comparability. (j) The TPO/AO erred on facts and in law in considering a set of 'secret data', (i.e. data which was not available in public domain), in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. 4. Comparability analysis adopted by the TPO/AO for determination of arm's length price in relation to the IT support services segment (a) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study, without considering the functional and risk analysis of the Appellant in respect of the IT support services segment. (b) Without prejudice to Ground 4(a), the AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. (c) Without prejudice to Ground 4(a), the AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules, 1963 and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. (d) Without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt turnover (a) On the facts and in the circumstances of the case, the learned AO has erred in reducing the travel expenses amounting to ₹ 43,486,353 and ₹ 111,493,741 from the export turnover of units while computing the deduction under section 10A and section 10B of the Act respectively, irrespective of the applicant's submission that it is engaged in the business of software development and not in rendering technical services. (b) On the facts and in the circumstances of the case, the learned AO has erred in reducing the telecommunication expenses amounting to ₹ 2,637,554 and ₹ 37,541,039 only from the export turnover and not from the total turnover of the units while computing deduction under section 10A and section 10B of the Act respectively. (c) Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO has erred, inter alia, in: • Reducing total travel expenses from export turnover instead of the travel expenses incurred in foreign currency, as stipulated in the definition of the term export turnover under section, 10A and section 10B of the Act; • Not making any corresponding reduction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s filed by the Appellant in relation to the draft-assessment order and TP order issued by the AO/TPO in the proceedings before them. (b) The DRP further erred on facts and in law confirming the draft order of the AO. 16. Relief (a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. (b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. (c) Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/TPO and upheld by Hon'ble DRP is bad in law and liable to be deleted. 3. Subsequently, vide application dated 18/10/2016, the assessee sought for admission of the following additional grounds of appeal: 1. The lower authorities have erred in adopting Helios & Matheson Information Ltd, Thirdware Solutions Ltd. (Seg) and Persistent Sytems Ltd as comparable even though it is functionally different from the software development service segment of the Appellant. 2. The lower authorities have erred in ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th other companies rendering software development services, and ITe services. For the purpose of transfer pricing study, the assessee-company had chosen 28 companies as comparable entities in respect of 'software development services and 9 comparables in IT support services arithmetic average of operating profit margins of said comparables was computed at 14.53%% in respect of software development services and 26.14% in respect of ITeS segment and 9.26% in respect of IT support services segment. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm's length. 6. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 29/10/2010 passed u/s 92CA of the IT Act, 1961 computed the transfer pricing adjustment at ₹ 42,85,55,129/- in respect of software development services and ₹ 29,74,56,774/- in respect of IT support services segment. However, the TPO accepted the TP analysis carried out by the assessee-company in respect of ITeS segment and held that the transactions are at arms' leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S Information Systems Ltd (Seg.) 2.00 30.55% 24.39% 13 LGS Global Ltd (Lanco Global Solutions Ltd) 45.39 15.75% 16.14% 14 Lucid Software Ltd 1.70 19.37% 18.02% 15 Mediasoft Solutions Pvt Ltd 1.85 3.66% 2.59% 16 Megasoft Ltd (Seg.) 139.33 60.23% 52.29% 17 Mindtree Ltd 590.35 16.90% 16.33% 18 Persistent Sytems Ltd 293.75 24.52% 24.40% 19 Quintegra Solutions Ltd 62.75 12.56% 10.20% 20 R S Software (India) Ltd 101.04 13.47% 14.11% 21 R Systems International Ltd (Seg.) 112.01 15.07% 14.22% 22 Sasken Communication Technologies Ltd (Seg.) 343.57 22.16% 27.08% 23 SIP Technologies & Exports Ltd 3.80 13.90% 11.69% 24 Tata Elxsi Ltd (Seg.) 262.58 26.51% 27.18% 25 Thirdware Solutions Ltd (Seg) 36.08 25.12% 22.49% 26 Wipro Ltd (Seg.) 9.616.09 33.65% 35.48% Arithmetic Mean 25.14% 24.13% The TPO computed average profit margin of the comparables in respect of software development services at 25,14% and after giving working capital adjustment of 1.016%, adjusted arithmetical mean of PLI was determined at 24.13%. On the above basis, the TPO computed the transfer pricing adjustment in respect of software segment as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nown as Spanco Telesystems & Solutions Ltd) 35.00 25.81% 20.89% 23 Triton Corporation Limited 53.37 34.93% 26.87% 24 Vishal Information Technologies Limited 30.60 51.19% 43.57% 25 Wipro Limited (Seg) 939.78 29.70% 31.41% 26 Nittany Outsourcing services Pvt. Ltd. 73.23 11.50% 11.75% 27 Accurate Data converters Ltd. 4.33 50.68% 49.40% 28 Apex Advanced Tech Pvt. Ltd. 7.91 39.89% 40.91% Arithmetic Mean 30.55% 29.89% Thus arrived at average arithmetic mean of 30.55% and after giving working capital adjustment of 0.67% in respect of IT support segment, the adjusted arithmetical mean PLI was determined at 29.89% in respect of IT support segment. On the above said basis, the TPO computed the transfer pricing adjustment in respect of IT support Segment as follows: Arm's length mean margin 30.55% Less: Working capital adjustment 0.67% Adjusted mean margin after working capital adjustment 29.89% Operating Cost (A) 995,171,541 Arm's length price -126.93% of operating cost (B) 1,292,628,315 total operating Revenue ©* 1,092,300,283 Short fall being Adjustment u/s 92CA (B - C) 200,328,032 The total summary of transfer pricing adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese companies are into the business of Knowledge Process Outsourcing (KPO). Accordingly, the Tribunal held that these companies cannot be compared with assessee-company which is engaged in IT enabled services. The relevant paragraphs of the order of the Tribunal in the case of First Advantage Offshore Services (P.) Ltd. (supra) are extracted hereunder: "39, Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPQ, The TPO has also reproduced the said objections in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the assessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services, like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies cannot be compared with smaller companies. Following the decision of Hon'ble Delhi High Court as well as the Tribunal in the above cited cases, we direct the TPO/AO to exclude these companies from the list of comparables. 11.3 The assessee seeks exclusion of the following companies on the ground that these companies fail employee cost filter of 25% to total revenue applied by the TPO: i. Accentia Technologies Ltd. (seg) ii. Asit C Mehta Financial Services Ltd. iii. Cosmic Global Ltd. iv. Informed Technologies India Ltd, Reliance in this regard was placed on the decision of the Tribunal in the case of e4e Business Solutions India (P.) Ltd. v. Dy. CIT [2016] 69 taxmann.com 73 (Bang. - Trib.) wherein it has been held: "15. The Assessee next seeks exclusion of the following four companies from the list of comparable companies by applying the employee cost to sales filter, viz., Asit C. Mehta Financial Services Ltd., (previous known as Nucleus Netsoft and GIS Limited), Informed Technologies Ltd., Vishal Information Technologies limited (now known as Coral Hub Limited) and Accentia Technologies Ltd, The employee cost filter is an accepted filter in the matter of choo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration before the co-ordinate bench of this Tribunal in the case of e4e Business Solutions India (P.) Ltd. (supra) wherein it has been held: 17. As far as comparable company at SI. Nos. 5, 14 &16 of the chart of comparable companies chosen by the TPO viz., Appollo Health Street Ltd., M/S.HCL Comnet and M/S. Informed Technologies India Ltd., are concerned, it is not in dispute before us that the related party transaction in the case of companies exceeds 15% (17.77 % in the case of Appollo Health Street Ltd., 21.52% in the case of HCL Comnet and 15.93% in the case of Informed Technologies India Ltd.) and in view of the decision of the Tribunal in the case of 24/7 Customer Com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344 (Bang.), followed by this Tribunal in the case of Logica (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 374 (Bang. - Trib.) wherein it was held that where the RPT exceeds 15%, such companies should not be taken as comparable companies. Following the said decision, we hold that companies at SI. Nos. 5, 14 & 16 referred to above of the list of the comparable companies chosen by the TPO be excluded from the list of comparable companies while working out the ALP. In res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the exclusion of this company from the final set of comparable. " Learned Standing Counsel has not brought anything controverting the findings of the Tribunal in the above case. Therefore, we have no reason to differ with the reasoning adopted by the co- ordinate bench in the case of Stream International Services (P.) Ltd. (supra). Therefore, we direct the AO/TPO to exclude this company form the list of comparables. 11.6 The assessee seeks exclusion of the following companies on the ground that their financial results are not reliable: i. Maple Esolutions Ltd. ii. Triton Corporation Ltd. The comparability of Maple Esoiutions Ltd., and Triton Corporation Ltd. had come up for consideration before the co-ordinate bench of this Tribunal in the case of e4e Business Solutions India (P.) Ltd. (supra) wherein it has been held: "14. With regard to company at SI.Nos.19 & 23 of the list of comparable companies chosen by the TPO viz., M/s. Maple E solutions Ltd., and Triton Corporation Ltd., the Mumbai Bench of the Tribunal in the case of Stream International Services (P.) Ltd., (supra) in para 13(iii) at page-14 of the order held that the promoters of these two companies were i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company as a comparable company after affording opportunity of being heard to the assessee. " Learned Standing Counsel has not brought anything controverting the findings of the Tribunal in the above case. Therefore, we have no reason to differ with the reasoning adopted by the co-ordinate bench in the case of e4e Business Solutions India (P.) Ltd. (supra). Therefore, we direct the AO/TPO to exclude these companies form the list of comparables. 11.8 As regards Apex Advanced Tech Pvt. Ltd. it is submitted that this company is not functionally comparable with that of the assessee-company as it is engaged in the business or providing data creation services. We find that this submission of the assessee is supported by information contained in the financial reports of the company which is placed at page 23 of the financial statement Therefore, we hold that this company is functionally different with that of pure software development service company and we direct the AO/TPO to delete this company from the list of comparables. SOFTWARE SEGMENT: 12. In respect of software segment, the assessee-company seeks exclusion of the following 16 companies. (1) M/s. Accel Transmatic Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as well as in the case of First Advantage Offshore Services Pvt. Ltd. (supra). In coming to the aforesaid conclusion, the Tribunal in the case of First Advantage Offshore Services Pvt Ltd (supra) followed the decision rendered in the case of Trilogy E-Business Software India Pvt Ltd v. DCTT ITA No.l064/Bang/2011 for AY 07- 08 order dated 23.11.2012. The following were the relevant observations in the case of First Advantage Offshore Services Pvt. Ltd. (supra): "18. As regards the group 2 companies which are to be excluded as functionally different based on the Tribunal order in the case of Trilogy E-Business Software India Pvt. Ltd., we find that these companies are- (1) Accel Transmatic (2) Avani Cimcon Technologies Ltd. (3) Celestial Labs Ltd. (4) KALS Information Systems Ltd. 19. The Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd, while considering the issue of improper selection of comparables has held as under: 2. (b) Avani Cimcon Technolosies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable. 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 IT AT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. (c) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- i. In the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income-tax Act. " ii. As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regard.' " 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assesses is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v. Ad, CIT12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd, the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers) - training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 and 25 of the final list of comparable companies chosen by the TPO are concerned, viz., M/S. E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Limited and Third ware Solutions Ltd., this Tribunal in the case of 3DPLM Software Solutions Ltd. LT (T.P) A. No. 1303/Bang/2012 (Assessment Year : 2008-09) order dated 28.11.2013 was pleased to hold that the aforesaid companies are not comparable with a company engaged in Software Development Services such as the Assesses. The following were the relevant observations of the Tribunal: "14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P.) Ltd. (supra) that KPO services arenot comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software, In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that: (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service provider like the Assessee by the IT AT 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 he excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT- services segment." 17. As per the discussion in para 6.3.2, of the order of the TPO, the reason advanced for including KALS Information 'Systems Ltd, is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessees segment of IT servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, 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 Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from Software products and the break-up of the software product revenues is notavailable. (iii) This company has incurred huge research and development expenditure to the tune of approximately ₹ 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes and for computing the margins, which contradicts the TPO's own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and-software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Tribunal in the case of Telecordia Technologies India Pvt Ltd. v. ACIT (ITA No. 7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- ".... Tata Elxsi is engaged in development of niche product and development, services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also outsourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decision of the co- ordinate bench, we hold that these two companies are also to be excluded. 21. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP, Thus, we direct exclusion of these two companies also from the list of comparables." As regards Megas of Ltd., the only objection of the learned AR is that only margins of software segment alone should be considered for the purpose of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are product developer. According to the Assessee there is no break up of revenue between software products and software services business on a standalone basis of this comparable. The TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software. This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company "also explained that 30 to 40% of the product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t also, in contrast to the entity level margins. 28. Computation of the net margin for Mega Soft Ltd. is therefore remitted to the file of the TPO to compute the correct margin by following the direction of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd." 23. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to compute the correct margin of Mega Soft Ltd., as directed by the Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. (supra). We therefore, direct that the AO/TPO shall compute the correct margin of M/s Megasoft Ltd., while retaining it in the list of comparables." Accordingly, we direct the AO/TPO to consider only profit margin of the software segment for the purpose of computing while arm's length price of the transaction. As regards Flextronics Software Systems Ltd. (seg), it is submitted that it is engaged in the business of providing end to end provider of communication products, services and solutions to network equipment providers, handset manufacturers, service providers and business process outsourcing sectors. In this regard the learned AR relied on the decision of the co- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Dy. CIT [2012] 28 [2013] 140 ITD 344 (Bang.). We heard rival submissions and perused the material on record. In the present case, the TPO has applied RPT filter of 25%. The learned AR has not challenged the applicability of this filter. Therefore, we hold that this company cannot be excluded from the list of comparables. Corporate Issues: Ground No.9 challenges restricting the deduction u/s 10A and 10B by reducing travel expenditure and telecommunication expenses from export turnover alone. Learned AR vehemently contended that freight, telecommunication expenses and insurance attributable to delivery of software outside India are expenses incurred in foreign exchange should not be reduced from export turnover or total turnover where business of the taxpayer is only in the nature of export out of India of computer software and not rendering technical services. He further submitted that the Hon'ble jurisdictional High Court in the case of CIT v. Mphasis Ltd. in ITA No, 1075/2008 & 196/2009 and CIT v. Keshema Technologies Ltd. [2016] 66 /381 ITR 435 (Kar.) held that freight, telecommunication charges or insurance incurred in foreign currency should not be reduced from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and gains derived from, on site development of computer software including services for the development of such software outside India is deemed to be the profits and gains derived from the export of computer software outside India. In other words, the services rendered by the assessee relating to the development of computer software is deemed to be part of export turnover of computer software outside India. 14. An identical issue relating to section 80HHE of the Act was considered by this court in the case of CIT v. Motor Industries Co. Ltd. [2015] 55 taxmann.com 377 (Kar.) and this court has held that though the services rendered in deputing the software engineers abroad who among other things have to do testing, installation and monitoring of software supplied to the client, appears to be technical in nature, it does not fail within the clause of providing technical service outside India in connection with the development or production of computer software and accordingly such expenditure cannot be excluded in computing export turnover. To decide the question on hand, the Tribunal has placed reliance on the Judgment passed by the Tribunal in the Case of Mphasis Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;total turnover' for the purposes of section 10A of the Act has held that the total turnover is inclusive of the export turnover. Therefore, the formula for computation of deduction under section 10A is laid down as under: 'Profits of the business of the undertaking X Export Turnover (Export turnover + domestic turnover) = Total turnover' Applying the said principles of law enunciated by this court in the case of Tata Elxsi Ltd. (supra), we are of the view that the arguments advanced by the revenue if, accepted would lead to absurdity. We have no reason to differ from the Judgment of this court which is more particularly rendered in the context of section 10A of the Act. It is also to be noticed that the Judgment relied upon by the revenue in the case of Punjab Stainless Steel Industries (supra) interpreting the term 'turnover' in terms of section 80HHC of the Act. 17. Section 10A of the Act is a beneficial provision. The purpose of section 10A of the Act is also to bring more foreign exchange and to encourage export and as the Government decides to give some benefit to such undertaking which is helping the nation in bringing foreign exchange, the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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