Tibco Software India Private Limited,, ... vs Assessee

TIBCO Software (India) Pvt. Ltd., 'Binarius' Floor No.2 & 3, Deepak Complex, National Games Road, Shastri Nagar, Yerwada, Pune - 411 006. PAN : AACCT6136F .... Appellant

Vs.

Dy. Commissioner of Income Tax, Circle 1(2), Pune. .... Respondent

Appellant by : Mr. Ashwani Taneja Respondent by : Mr. Sandeep Garg, CIT Date of hearing : 16-03-2015 Date of pronouncement : 10-04-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal has been preferred by the assessee pertaining to

the assessment year 2009-10, which is directed against the order of the

Dy. Commissioner of Income Tax, Circle 1(2), Pune (in short 'the Assessing

Officer') passed u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961

(in short "the Act") dated 10.12.2013, which is in conformity with the directions

given by the Dispute Resolution Panel, Pune (in short 'the DRP') dated

09.12.2013.

2. In this appeal, the Grounds of Appeal raised by the assessee read as

under: -

"Ground No.1: Transfer Pricing adjustment The Learned Assessing Officer ('Ld.AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted by the Appellant and thereby making a transfer pricing 2 ITA No.94/PN/2014

adjustment of Rs.3,61,96,655/- to the income of the Appellant by holding that the international transaction of provision of software development services of the Appellant does not satisfy the aim's length principle envisaged under the Income-tax Act, 1961 ('the Act').

Ground No.2: Erroneous treatment of Foreign Exchange gain/loss • The Ld. AO/Ld. Transfer Pricing Officer ('Ld.TPO') erred in considering foreign exchange loss/gain as operating cost/income while computing the operating margins of the comparables for computation of the arm's length price of the transaction of provision of software development service.

• The Hon'ble DRP erred in interpreting the appellant's objection towards treatment of foreign exchange gain/loss as objection to consider foreign exchange gain/loss as operating, whereas the Appellant had objected to the treatment of the same as operating item, as considered by the Ld.AO/Ld. TPO. In doing so, the Hon'ble DRP erred in confirming the transfer pricing adjustment, though it has "in-principle"

agreed to the objection of the Appellant that foreign exchange gain/loss should be considered as non-operating items while computing the operating margins.

Ground No.3: Error in not giving effect to the DRP directions in respect of conducting working capital adjustment to operating margin of Goldstone Technologies Ltd. ('Goldstone').

The Ld. AO erred in computing the transfer pricing adjustment without giving effect to the DRP directions which specifically directed the Ld.AO/TPO to re- arrive at the operating margin of Goldstone after conducting working capital adjustment, which was erroneously not computed by the Ld.TPO, though the operating margins of other comparables were considered after conducting the working capital adjustment.

Ground No.4: Erroneous addition/rejection of certain comparables The Hon'ble DRP/Ld.AO/Ld.TPO erred in modifying the set of comparable companies identified by the Appellant in its Transfer Pricing Study Report for provision of software development services. In doing so, Hon'ble DRP/Ld.AO/Ld.TPO specifically erred in:

4.1. considering and retaining the functionally incomparable FCS Software Solutions Limited ('FCS') as comparable, despite the fact that the Appellant had demonstrated that FCS is:

• engaged in non comparable service activities, i.e. IT enabled service activities whereas the transfer pricing adjustment is to the software development services segment of the Appellant; and • a "Company having high quantum of branch expenses", which is a rejection criteria applied by the Ld.TPO himself while finalizing that the set of comparables for software development services segment of the Appellant;

4.2. considering retaining the functionally incomparable Application Software Segment of KALS Information Systems Limited ('KALS') as comparable, despite the fact that the Appellant had demonstrated that KALS:

• own software products which cannot be considered comparable to the functional and asset profile of the Appellant;

3 ITA No.94/PN/2014 • has reported erroneous segmental financial information in its Annual Report, which was considered by the Ld. TPO; and • has been rejected by the jurisdictional Pune Bench of the Hon'ble ITAT in the case of PTC Software (India) Ltd. [ITA No.1605/PN/2011 (AY 2007-08) and ITA No.1346/PN/2010 (AY 2006-07)] and Bindview (India) Pvt. Ltd. (ITA No.1386/PN/2010) on account of similar reasons;

4.3. rejecting the functionally comparable E-Infochips Ltd., which was duly approved as a comparable by the Hon'ble DRP for the AY 2008-09, on the basis of erroneous reasoning that the year under consideration is an exceptional year based on its financial results;

4.4. rejecting the functionally comparable Avani Cimcon Technologies Ltd.

('Avani'), based on erroneous reason, i.e. unavailability of audited annual accounts for the Financial Year ('FY') 2008-09, despite the fact that the available audited financials for FY 2009-010 had all the financial details pertaining to FY 2008-09;

4.5. rejecting the functionally comparable Software Services Segment of Sasken Communications Ltd., on the erroneous basis of business restructuring of its non comparable segment;

4.6. rejecting the following functionally comparable companies by applying the turnover filter of Rs.2 to Rs.200 crores, without giving any opportunity to the Appellant, of being heard:

• Persistent Systems Ltd., • IT Services Segment of Mindtree Ltd., and • Larsen and Toubro Infotech Ltd.;

4.7. rejecting a functionally comparable RS Software Ltd. based on earlier year's disposition by the Hon'ble DRP, without conducting any analysis for the year under consideration, despite the fact that it was accepted as a comparable in both the Show Cause Notices ('SCNs') issued by the Ld.TPO during the course of the assessment proceedings; 4.8. rejecting the following functionally comparable companies on account of the quantum of onsite revenues, however simply ignoring the fact that the Appellant is also required to render services on an onsite basis:

• Akshay Software Technologies Ltd., • Zylog Systems Ltd., and • Thinksoft Global Services Ltd.; and 4.9. rejecting the functionally comparable Helios and Matheson Ltd. on the erroneous basis that the annual accounts cover the period of 18 months whereas the comparable data should be for 12 months for reliable comparability.

Ground No.5: Erroneous rejection of economic adjustment for difference in levels of risks Hon'ble DRP/Ld.AO erred in not allowing an adjustment for the difference between the level of risk borne by the comparable and the Appellant, despite the fact that the Appellant has demonstrated these differences by submitting a detailed analysis of Functions performed, Assets employed and Risks assumed ('FAR analysis') before the Hon'ble DRP. In doing so, Hon'ble DRP/Ld.AO erred in:

4 ITA No.94/PN/2014

• failing to appreciate that the Appellant is a routine captive service provider as against the selected comparable companies, which include entrepreneurial companies and hence an adjustment is necessary; and • Disregarding the provisions of Rule 10B(1)(e)(iii), 10B(2) and 10B(3) read with Rule 10C of the Income-tax Rules, 1962 ('the Rules'). Ground No.6: Not allowing the use of multiple year data Hon'ble DRP/Ld.AO erred in not allowing the use of multiple year data as prescribed under Rule 10B(4) of the Rules and determining the arm's length price on the basis of financial information of the comparables for the previous year 2007-08 which was available in the public domain at the time of assessment proceedings but not at the time when the Appellant conducted its analysis to comply with the provisions of Rules 10B(4) and 10D(4) of the Rules.

Ground No.7: Ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act Hon'ble DRP/Ld.AO erred in ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits derived from the software development services and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions.

The above grounds are without prejudice to each other.

Your Appellant craves leave to add, amend, alter, modify and/or substitute, and to withdraw the above grounds of appeal."

3. In this appeal, assessee has raised multiple Grounds of Appeal as

aforestated but the sum and substance of the dispute arises from an addition

of Rs.3,61,96,655/- made to the returned income on account of determination

of the arm's length price of assessee's international transactions entered with

its associated enterprises.

4. The appellant is a company incorporated under the provisions of the

Companies Act, 1956 and is a wholly owned subsidiary of TIBCO US. The

assessee company is primarily engaged in providing software research and

development services to TIBCO US as per the design, production orders,

plans, process specification and production schedules provided by the TIBCO

US. The unit of the assessee is registered as a 100% Export Oriented Unit

(EOU) under the Software Technology Park of India (STPI) scheme and the

profits therefrom are eligible for the benefits of section 10A of the Act. The 5 ITA No.94/PN/2014

assessee company was found to have entered into three types of international

transactions with its associated enterprises within the meaning of section 92B

of the Act. Such international transactions were - Provision of software design

and development services; Provision of sales and customer support services;

and, Payment of interest on external commercial borrowings for consideration

of Rs.37,77,70,214/-; Rs.6,70,63,155/-; and, Rs.22,73,832/- respectively. The

Assessing Officer noted that assessee had furnished its return of income for

assessment year 2009-10 declaring an income of Rs.85,91,335/- which, inter-

alia, contained the aforestated international transactions entered with

associated enterprises i.e. TIBCO US. The Assessing Officer made a

reference to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for

determining the arm's length price of the international transactions for the

purposes of computing income from such transactions in terms of section

92(1) of the Act. The TPO has passed an order u/a 92CA(3) of the Act dated

29.01.2013 in terms of which he had computed an adjustment of

Rs.3,61,96,665/- to the stated value of the international transactions relating to

the Provision of software design and development services in order to

determine its arm's length price, which is the subject-matter of dispute in the

present appeal. In so far as the other two kinds of international transactions

entered by the assessee with its associated enterprises on account of (i)

Provision of sales and customer support services; and, (ii) Payment of interest

on external commercial borrowings are concerned, the TPO has accepted the

stand of the assessee that the stated values of such transactions are at an

arm's length price. On the basis of the arm's length price determined by the

TPO, Assessing Officer has passed an order u/s 143(3) r.w.s 144C(1) of the

Act dated 10.12.2013 determining the total income of the assessee in

conformity with the arm's length price so determined by the TPO as mandated

by section 92CA(4) of the Act. It is also to be noted that the Assessing Officer

passed his order dated 10.12.2013 (supra) after considering the directions of 6 ITA No.94/PN/2014

the Dispute Resolution Panel (in short "the DRP") dated 09.12.2013 which

were rendered in response to assessee raising objections to the draft

assessment order passed by the Assessing Officer dated 19.03.2013 which

was also in line with the order of the TPO dated 29.01.2013 (supra). In this

background, the rival counsels have been heard with respect to the addition of

Rs.3,61,96,655/- made to the returned income on account of the determination

of arm's length price.

5. At the time of hearing, it was a common point between the parties that

the substantive issues in this year, which arise from the order of the TPO

dated 29.01.2013 (supra) are primarily similar to those considered by the

Tribunal in the assessee's own case for the immediately preceding

assessment year 2008-09 vide ITA No.2536/PN/2012 dated 11.02.2015.

Before we proceed to adjudicate the specific dispute raised before us, it would

be appropriate to observe that in its Transfer Pricing Study assessee had

benchmarked its international transactions relating to the Provision of software

design and development services entered with its associated enterprises by

adopting the Transactional Net Margin (TNM) Method. The assessee had

used Operating Profits/Operating Cost (OP/OC) as the Profit Level Indicator

(PLI). The assessee compared its PLI of 18.72% with the arithmetic mean of

the margins of the comparable cases selected at 11.73%; and, as assessee's

PLI was found to be higher than the arithmetic mean of the margins of the

comparable cases, it was canvassed by the assessee that the stated value of

the international transactions of Provision of software design and development

services was at an arm's length price. The TPO has not disputed the adoption

of TNM Method as the most appropriate method and he has also not differed

with the adoption of OP/OC as the PLI for the purposes of comparability

analysis. Similar was the situation in the immediately preceding assessment

year 2008-09. Further, the TPO disagreed with the assessee regarding the 7 ITA No.94/PN/2014

adoption of the PLI of the comparable cases on the basis of the financial data

of multiple years which according to him were not relevant to the period for

which assessee's international transactions were being tested. As per the

TPO, it was more appropriate to adopt the financial data of the comparable

concerns for the contemporaneous period i.e. for the financial year ending on

31.03.2009 for the purposes of the comparability analysis. Though assessee

has contested the aforesaid action of the TPO by way of abovestated Ground

of Appeal No.6 but at the time of hearing the said Ground of Appeal has not

pressed and is accordingly dismissed.

6. Nevertheless in the course of Transfer Pricing proceedings, assessee

was show-caused on this aspect and on the basis of the revised search

assessee suggested certain inclusions and exclusions in the list of comparable

concerns. The TPO, after considering the financial data of the comparable

cases pertaining to the financial year under consideration, has selected the

following final set of comparables :-

Sr.No. Company Name Corrected OP/OC after OP/OC W.C. Adjustment

1. Bodhtree Consulting Ltd. 62.29 60.55 2. F C S Software Solutions Ltd. 34.63 30.66 3. KALS Information Systems Ltd. 41.91 40.46 (Application Software Segment) 4. L G S Global Ltd. 20.50 14.76 5. Goldstone 3.94 3.94 30.07

7. On the basis of the above, the TPO adopted the arithmetic mean of the

PLI of the comparables at 31.21% (i.e. after working capital adjustment) and

compared it with assessee's PLI of 18.72% and accordingly an adjustment of

Rs.3,61,96,655/- has been made to the stated value of the international

transactions in order to determine the arm's length price. 8 ITA No.94/PN/2014

8. The aforesaid approach of the TPO is quite pari-materia to the

approach adopted by him in the assessee's own case for assessment year

2008-09 (supra).

9. At the time of hearing, in so far as the Ground of Appeal No.1 is

concerned, no specific arguments were advanced as it is general in nature.

10. With regard to the issues raised in Ground of Appeal Nos.2 and 3, it

was stated that on being approached by the assessee by way of a rectification

application, the DRP has passed a rectification order and issued further

directions on 06.03.2014 and for the present the said Grounds of Appeal do

not require any adjudication. In this background, in so far as the Ground of

Appeal Nos.2 and 3 are concerned, they are dismissed as infructuous.

11. The specific arguments put-forth before us at the time of hearing are

manifested by the Ground of Appeal No.4 which relates to assessee's stand

that the income-tax authorities have erred in accepting certain comparables

and/or in rejecting certain comparables while benchmarking the international

transactions relating to the Provision of software design and development

services to the associated enterprises. At the time of hearing, assessee had

furnished voluminous Paper Books. The material referred and relied upon by

the Ld. Representative for the assessee has been duly considered by us while

disposing of the present appeal. The Ld. CIT-DR appearing for the Revenue

relied upon the stand of the lower authorities in support of the case of the

Department.

12. By way of Ground of Appeal No.4.1, the plea of the assessee is for

excluding FCS Software Solutions Ltd. from the final set of comparables. On

this aspect, the point made out by the assessee is that the said concern is 9 ITA No.94/PN/2014

functionally different from the assessee inasmuch as the majority of services

rendered by it are in the category of IT enabled services and therefore it is not

to comparable to assessee's activity of providing software design and

development services to the associated enterprises. The Ld. Representative

for the assessee has referred to para 11(xv) of the order of the TPO to point

out that the TPO included the said concern as comparable primarily on the

ground that the same was also included by him in the Transfer Pricing

assessment for the preceding assessment year 2008-09. In this context, the

Ld. Representative for the assessee submitted that before the lower

authorities, assessee had pointed out that the revenue earned by the said

concern from software development activities was less than 75% of the total

revenue and therefore it was excludible from the list of comparables. The Ld.

Representative pointed out that the Tribunal in the assessee's own case for

assessment year 2008-09 vide its order dated 11.02.2015 (supra) has

excluded the said concern from the final set of comparables. It has also been

pointed out that for assessment year 2010-11 in assessee's own case the said

concern has been excluded from the final set of comparables as per the order

of the DRP, a copy of which has been placed in the Paper Book at pages

1674 to 1738.

13. The Ld. CIT-DR appearing for the Revenue has not contested the

assertions of the assessee that under similar circumstances, the said concern

has been directed to be excluded from the final set of comparables by the

Tribunal in the assessee's own case vide order dated 11.02.2015 (supra).

14. We have carefully considered the rival submissions. In this context, we

have perused the order of the Tribunal in the assessee's own case dated

11.02.2015 (supra) wherein the following discussion is relevant :- 10 ITA No.94/PN/2014

"23. We have carefully considered the rival submissions. In fact, the TPO has reproduced in para 15.7 the written submissions of the assessee on this aspect. The first plea raised by the assessee was that income earned by the said concern from rendering of application support services and infrastructure management services, which constitute 11% and 15% respectively of the total revenue, are in the nature of IT enabled services and not linked to the software development services. On this basis, it was sought to be pointed out that if the aforesaid income streams are excluded from the segment of software development services, then the income from software development services segment falls below 75% of the total income. The TPO had applied a filter to exclude such concerns from the list of comparables, wherein the income from software development services was less than 75% of the total income. In fact, in the discussion made by the TPO in response to assessee's aforesaid assertions, there is no denial to the same. Though the TPO goes on to rely on the CBDT's Circular dated 26.09.2000 (supra), but that is in relation to the activity of E-learning and Digital Consulting being carried out by the assessee. The segment of E-learning and Digital Consulting is a different segment. In any case, assessee's plea based on the nature of services on account of application support services segment and infrastructure management services segment have not been rebutted by the TPO. Therefore, we are inclined to hold that the application support services and infrastructure management services, which constitute 11% and 15% respectively of the total income, are IT enabled services and not linked to the software development services.

24. Moreover, the assessee had referred to the following extract from the Annual Report of the said concern in relation to the E-learning and Digital Consulting before the TPO to say that it is in the nature of IT enabled services:-

"E-learning and Digital Consulting Services:

US corporations look at E-learning of web / CD based training programs as one of the ways to achieve organizational growth and improved business performance. E-learning helps employees, vendors, and dealers of a company to better their performance and deal with fast-changing environments. E-learning makes training highly efficient, by making it available anytime, anywhere and reduces total cost of training. E-learning is used to train employees, customers and service technicians on product knowledge, concepts, strategies, risk and finance, compliance and technology."

25. Ostensibly, the aforesaid services involve setting up of support centres and remote maintenance, which have been duly categorized as ITES by the CBDT's Circular dated 26.09.2000 itself, which has been reproduced by the TPO in the impugned order. Therefore, even the said segment is not to be included as part of the software development services, as asserted by the assessee. Once the segment of application support and infrastructure management services are removed along with the exclusion of E-learning and Digital consulting segment, then the income of the said concern from software development services falls below 75% of its total income and therefore, it deserves to be excluded even on the basis of the filter applied by the TPO. Thus, on this aspect, assessee succeeds."

11 ITA No.94/PN/2014

15. Ostensibly, the Tribunal has excluded the said concern on the ground

that its income from software development services was below 75% of the

total income. The fact-situation noted by the Tribunal in its order dated

11.02.2015 (supra) continues to hold in the present year also. For this, the Ld.

Representative for the assessee has referred to the submissions made before

the lower authorities based on the relevant extract of the Annual Report of the

said concern placed at pages 1739 to 1742 of the Paper Book. In terms of the

aforesaid, it is noticed that the proportionate income of the said concern in

various segments is as under :-

IT consulting - 48%; Infrastructure Management Services - 17%; and, E-learning and Digital Consulting - 35%.

16. On the basis of the aforesaid, it quite clear that the activities on account

of the Infrastructure Management Services and E-learning and Digital

Consulting which constitute 17% and 35% respectively of the total revenue are

obviously IT enabled services and are not akin to the software design and

development services being rendered by the assessee. On similar

considerations, the said concern was found to be incomparable to assessee's

segment of Provision of software design and development services in the

immediately preceding assessment year 2008-09 (supra) by the Tribunal.

Following the aforesaid precedent, which continues to hold the field, in this

year also on account of similarity in circumstances, we therefore uphold

assessee's plea for exclusion of FCS Software Solutions Ltd. from the final set

of comparables. This on Ground of Appeal No.4.1 assessee succeeds.

17. By way of Ground of Appeal No.4.2, the plea of the assessee is for

exclusion of M/s KALS Information Systems Ltd. (Application Software

Segment) from the final set of comparables. On this aspect, the primary plea

of the assessee is that the said concern is functionally different from the 12 ITA No.94/PN/2014

activities undertaken by the assessee in its segment of Provision of software

design and development services inasmuch as the said concern is engaged in

development and sale of software products and such activity is quite different

from that of the assessee. We find that the aforesaid plea of the assessee has

been consistently raised before the lower authorities. The TPO has included

the said concern in the final set of comparables primarily on the ground that

the said concern was included by him in the final set of comparables in the

immediately preceding assessment year 2008-09.

18. It was a common point between the parties that so far as the KALS

Information Systems Ltd. (Application Software Segment) is concerned, the

said concern was found to be incomparable by the Tribunal in its order dated

11.02.2015 (supra) in assessee's own case for assessment year 2008-09 on

the ground that it was functionally different. It was also a common point

between the parties that the facts and circumstances in this year remain the

same and therefore in view of the precedent in the assessee's own case, the

said concern is liable to be excluded.

19. Apart from the aforesaid, in the course of hearing, the Ld.

Representative also pointed out that for the very same assessment year 2009-

10, the said concern has been found to be incomparable to a concern

rendering software development services in the case of PTC Software (India)

Pvt. Ltd. vs. DCIT vide ITA No.336/PN/2014 dated 31.10.2014.

20. In this context, the following discussion in the order of the Tribunal in

the assessee's own case for assessment year 2008-09 dated 11.02.2015

(supra) is relevant :-

"10. The first plea of the assessee is with respect to M/s Kals Information System, (applications software segment), a concern which has been included 13 ITA No.94/PN/2014

as a comparable by the TPO for the purposes of comparability analysis. According to the assessee, the inclusion of said concern as a comparable is wrong because the said concern is functionally different from the activities undertaken by the assessee in its segment of Provision of software development and design services. As per the assessee, the said concern is engaged in development and sale of software products and such activity is quite different from that of the assessee which relates to rendering of software development services for its customers. Before the TPO, assessee referred to an extract from the Annual Report of the said concern for the financial year 2007-08 to point out that the software development expenditure was reported by the said concern as an element of inventory, which according to the assessee demonstrated that the said concern was a product company and not a software services company. It was also pointed out on the basis of the website of the said concern that it was owning software products like Virtual Insure, Ia vision, CMSS, Docuflo (Document Management System) to support its plea that the said concern was into development and sale of software products. It was also pointed out before the TPO that the said concern was also engaged in rendering training services and although the TPO had used the segmental information of application software only but the segmental data published by the said concern was erroneous and accordingly it was unreliable. The TPO however did not find any weight in the arguments of the assessee and noted that there was no material to say that the said concern was actual earning revenues from the sale of any proprietary products and according to him it is not uncommon for even a software development service provider to call their 'services' as 'product', thus such companies continue to be service providers. The DRP has also affirmed the stand of the TPO, against which assessee is in appeal before us.

11. On this aspect, the learned counsel for the assessee has reiterated the submissions put-forth before the lower authorities by pointing out that the applications software segment of the said concern was into development and sale of software products, which is an activity distinct from providing software development services undertaken by the assessee. Our attention has been drawn to pages 1086 and 1087 and pages 1092 to 1096 of the Paper Book wherein are placed relevant extracts of the Annual Report of the said concern for financial year 2007-08 and the website extract respectively to support the pleas raised before the lower authorities. It has also been pointed out that the activities of said concern were considered by the Pune Bench of the Tribunal in the case of Bindview India P. Ltd. vide ITA No.1386/PN/2010 order dated 30.11.2011, wherein it has been held that the said concern was functionally different from a software development service provider. A reference has also been made to the decision of the Bangalore Bench of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. vide ITA No.1054/Bang/2011 order dated 23.11.2012, wherein also said concern was held to be not comparable to a software development service provider.

12. On the other hand, the learned CIT-DR has reiterated the stand of the lower authorities by pointing out that mere ownership of software products would not make a concern functionally non-comparable to a software development service provider, who did not own any software product. According to him, such difference is not a material difference contemplated under the TNM method for the purposes of comparability analysis. Apart therefrom, it has been pointed out that the said concern vide a communication dated 13.01.2009 addressed to the Addl.CIT (TP), Hyderabad confirmed that its core business was that of software development service provider. Further, according to the learned CIT-DR even the error in the segmental reporting by 14 ITA No.94/PN/2014

the said concern would not alter the bigger picture that it was deriving income mainly from software development service. Accordingly, inclusion of the said concern in the final set of comparables is sought to be defended.

13. We have carefully considered the rival submissions. The pertinent point raised by the assessee is that the said concern is functionally not comparable to the activities undertaken by the assessee on account Provision of software development services. The services rendered by the assessee to its associated enterprise under the heading 'Provision of software development services' include development of software in accordance with the designs, production orders, plans, process specifications, and production schedules, etc. supplied by the associated enterprise. Assessee is remunerated on a cost plus markup (15%) basis for the services provided to the associated enterprise. Notably, the ownership of the product developed lies with the associated enterprise. The ownership of any documentation or know-how and any other proprietary information received from the associated enterprise for the purpose of rendering of services to the associated enterprise are also the property of the associated enterprise. Even any improvements made by the assessee to either of the aforesaid items during the course of providing services are also to be solely owned by the associated enterprise. Thus, the assessee has been correctly understood to be a mere software development service provider.

14. With respect to Kals Information System Ltd. (applications software segment), the point raised by the assessee is that this concern is engaged in development of software products and not purely/mainly in software development services. In this connection, the Bangalore Bench of the Tribunal in the case of Trilogy E-Business Software India P. Ltd. (supra) held that the said company was developing software products and was not purely/ mainly a software development service provider. Accordingly, the Bangalore Bench of the Tribunal held that the said concern was not comparable to the assessee before them, which was undertaking activities similar to the case before us, namely, software development services. In-fact, the Pune Bench of the Tribunal in the case of Bindview India P. Ltd. (supra) also considered a somewhat similar situation and, found M/s Kals Information System Ltd. (applications software segment) to be incomparable to a concern which was Providing software development services, as is the case of the assessee before us. Moreover, the material relied upon by the assessee before the lower authorities, copies of which have also been placed in the Paper Book filed before us, supports the assertions of the assessee that the said concern is engaged in development and sale of software product, etc., which is distinct from the software development services rendered by the assessee to its associated enterprise. Thus, we are inclined to uphold the plea of the assessee that the M/s Kals Information System Ltd. (applications software segment) is functionally incomparable to the assessee.

15. The attempt by the learned CIT-DR to support the stand of the TPO on the basis of a communication received by Addl.CIT (TP), Hyderabad regarding Kals Information System Ltd., in our view, is untenable. Ostensibly, such an information was not available in public domain and therefore it could not have been in the realm of consideration by the TPO and moreover, we find that the said assertion is quite contrary to the information available in public domain, namely, the Annual Report, and the website extract of the said concern, which have been pertinently referred to by the assessee.

15 ITA No.94/PN/2014 16. For the aforesaid reasons, we uphold the plea of the assessee for exclusion of M/s Kals Information System Ltd. (applications software segment) from the final set of comparables for the purposes of comparability analysis."

21. Following the aforesaid precedent, we direct the income-tax authorities

to exclude M/s KALS Information Systems Ltd. (Application Software

Segment) from the final set of comparables. Thus, on Ground of Appeal

No.4.2 assessee succeeds.

22. Now, we may consider the Ground of Appeal No.4.3 whereby assessee

has assailed the action of the TPO in excluding E-infochips Ltd. from the final

set of comparables. In terms of para 11(xiii) of the order of the TPO, it is

revealed that the said concern was excluded by him from the final set of

comparables on the ground that the instant assessment year is an

"exceptional year of business". In support, the TPO has relied upon the

following tabulation :-

Sr.No. Financial Total Sales Total Expenditure PBIT PBIT/cost % Year 1 2006-07 30.45 18.28 12.17 66.58% 2 2007-08 24.03 17.10 6.93 40.52% 3 2008-09 14.87 14.18 0.69 4.87% 4 2009-10 13.29 9.13 4.16 45.56% 5 2010-11 26.04 15 11.04 73.60%

23. On this aspect, the Ld. Representative for the assessee pointed out that

the said concern has been excluded on an erroneous reasoning that the year

under consideration was an exceptional year. In this context, it was pointed

out that in assessment year 2008-09, the said concern has been accepted as

a good comparable by the TPO himself. The Ld. Representative for the

assessee submitted that only reason advanced by the TPO is that the

PBIT/cost ratio in the current assessment year is only 4.87% which is quite low

in comparison to the preceding and succeeding years. The Ld.

Representative pointed out that the TPO has not substantiated on the basis of 16 ITA No.94/PN/2014

the Annual Report of the said concern as to how the year under consideration

was exceptional. Therefore it could not be said that the margin declared for

the year under consideration was not comparable. In this context, the Ld.

Representative has referred to pages 554 to 564 of the Paper Book wherein is

placed a copy of the Annual Report of the said concern to point out that the

only reason attributed for the decline in the margin is purported to be the slow-

down in the US economy. The Ld. Representative pointed out that the said

reason is applicable all across and the same applies even to the operations of

the assessee, which is rendering comparable services to its associated

enterprises in the USA. Therefore, it is sought to be contended that the said

concern is not a consistent loss maker and rather the lower profitability in this

year is on account of a normal business cycle and accordingly the said

concern cannot be excluded from the final set of comparables.

24. On the other hand, the Ld. CIT-DR appearing for the Revenue has

pointed out that the instant assessment year was an exceptional year

inasmuch as the said concern has witnessed a substantial drop in its turnover

in this year to Rs.13,30,60,610/- from Rs.21,03,37,967/- in the immediately

preceding year. It has also been pointed out that in this year the said concern

has earned an exceptional income by way of sale of units of Rs.2,90,57,578/-

as against a meager income of Rs.93,31,270/- on this count in the immediately

preceding year. It was therefore contended that based on the financial results

of the said concern for the instant assessment year, the said concern has not

carried out its business in normal circumstances, and its exclusion from the list

of comparables is justified.

25. We have carefully considered the rival submissions. In the context of

the controversy relating to exclusion of a concern on account of exceptional

year, it is to be understood that the question is dependent on the facts and 17 ITA No.94/PN/2014

circumstances of each case. Quite clearly, in the present case the tabulation

made by the TPO regarding the financial results of E-infochips Ltd. for the

preceding and succeeding assessment years show that in the present year the

PBIT/Cost has dropped to 4.87% which is quite low in comparison to the other

years. Nevertheless, the factum of lower margin in this year by itself cannot

be a ground to decide whether such concern is to be excluded or included in

the final set of comparables. The aforesaid aspect should only be a trigger

which would justify further investigation to establish whether the said concern

is to be taken as a comparable was not. The investigations are required to

ascertain as to whether the resultant margin in the current year is reflection of

a normal business condition or that it is a result of certain

exceptional/abnormal business conditions. In so far as the similarity of

functions are concerned there is no dispute that the activities carried out by

the said concern are comparable to the activities being rendered by the

assessee. So however, if it is found on investigation that the low margin of the

said concern does not meet the comparability analysis or that it is not a normal

business condition then we are of the view that the said concern should not be

included in the list of comparables for the purposes of determining the arm's

length price of the international transactions. Otherwise, the entity which

satisfies the comparability analysis even if it has a low margin which is

reflective of a normal business condition, should not be rejected solely on the

basis of that there is a dip in the profit margin in comparison to other years. In

the instant case, having regard to the discussion in the order of the TPO in

para 11(xiii), no cause has been identified for the decline in margin to 4.87%

as compared to the other assessment years, except for the purported mention

in the Annual Report of the slow-down in the US economy. In our considered

opinion, the said reason alone cannot be a ground to say that the said concern

is to be excluded because such a reason would be applicable to all the

concerns operating in such environment, and is not specific to E-infochips Ltd.. 18 ITA No.94/PN/2014

Therefore, in our view, the TPO has not demonstrated that the lower profit

margin of the said concern in this year is attributable to any abnormal business

condition which is far removed from the normal business conditions so as to

justify its exclusion on the basis of 'exceptional year'. In-fact, the fall in profit

margin is attributable to a generic reason, which is applicable to all the

industry players and is not specific to the said concern. In any case, there is

no case made out by the TPO that the said concern is functionally distinct from

the activities being carried out by the assessee. It has also been asserted

before us, without controversion from the side of the Revenue, that the said

concern has been accepted by the DRP in the assessee's own case for

assessment year 2008-09 to be functionally comparable. In the course of

hearing, the Ld. Representative also asserted that there has been no change

in the business of the profile of the said concern during the year in comparison

to preceding assessment year except fall in profit margin.

26. In so far as the plea raised by the Ld. CIT-DR based on the Annual

Report is concerned, in our view, it would not be appropriate to compare each

and every single item of income and expense in the financial statements in

order to measure its comparability. Moreover, we find that for assessment

year 2010-11 also, the said concern has been found to a good comparable by

the DRP in terms of order dated 29.12.2014 placed at pages 1674 to 1738 of

the Paper Book. Considered in the aforesaid light, in our view, the said

concern is liable to be included in the final set of comparables. We hold so

and accordingly assessee succeeds on Ground of Appeal No.4.3.

27. In so far as the Ground of Appeal No.4.4 relating to the exclusion of

Avani Cimcon Technologies Ltd. is concerned, the same has not been

pressed by the assessee at the time of hearing and accordingly it is dismissed. 19 ITA No.94/PN/2014

28. In so far as the Ground of Appeal No.4.6 is concerned, the same

relates to the plea of the assessee for including the following concerns in the

final set of comparables : (i) Persistent Systems Ltd.; (ii) IT Services Segment

of Mindtree Ltd.; and, (iii) Larsen and Toubro Infotech Ltd., which have been

excluded by the TPO on the basis of turnover filter. On this aspect, the

pertinent plea raised by the assessee is that the TPO applied a turnover filter

of excluding concerns with turnover exceeding Rs.200 crores and accordingly

rejected the said concerns from the final set of comparables, whereas

assessee was not show-caused on this aspect in the course of the

proceedings. The Ld. Representative pointed out the inconsistency on the

part of the TPO, whereby the same filter has not been applied in the

subsequent assessment year 2010-11, and the above concerns have been

accepted in the final set of comparables. Nevertheless, the Ld.

Representative pointed out that a similar situation had arisen in the assessee's

own case for assessment year 2008-09 wherein also the TPO had not show-

caused the assessee before applying the turnover filter of Rs.200 crores and

excluding certain concerns from the final set of comparables; and, the Tribunal

in its order dated 11.02.2015 (supra) has set-aside the impugned matter back

to the file of the Assessing Officer/TPO for consideration afresh. It was

therefore contended that the assessee would be satisfied if the matter is

restored back to file of the lower authorities for consideration afresh.

29. On the other hand, the Ld. CIT-DR appearing for the Revenue has not

seriously contested the plea of the assessee for remanding the matter back to

the file of the Assessing Officer/TPO for giving an opportunity of being heard

before application of the turnover filter.

30. We have carefully considered the rival submissions. The order of the

TPO as well as the show-cause notice issued by him in the course of Transfer 20 ITA No.94/PN/2014

Pricing proceedings show that no opportunity was allowed to the assessee

before applying the turnover filter. Similar situation has been dealt with by the

Tribunal in the assessee's own case for the assessment year 2008-09 vide

order dated 11.02.2015 (supra) in the following manner :-

"46. We have carefully considered the rival submissions on the above aspect. It is quite evident that at the level of TPO, no opportunity was allowed to the assessee before excluding the aforesaid four concerns from the list of comparables by applying a Turnover limit of Rs.200 crores. In-fact, the show- cause notice issued by the TPO dated 05.10.2011 did not contain any issue regarding exclusion of the aforesaid four comparables and/or application of Turnover filter of Rs.200 crores. In-fact, it is also evident from the order of the TPO that no reason has been assigned to adopt the Turnover filter of Rs.200 crores, especially when no such filter has been applied by the TPO himself in assessment year 2010-11, as asserted by the assessee before us. In our considered opinion, such an approach impinges on the principles of natural justice and the assessee is rightfully aggrieved. In so far as the opportunity of raising objections before the DRP is concerned, in our view, the same cannot take the place of an opportunity that was required to be allowed before the TPO; that the assessee had an opportunity before the DRP is of no consequence for it is the fairness and reasonableness of furnishing of an explanation before the TPO which is the issue. In-fact, in a somewhat similar situation the Hon'ble Supreme Court in the case of Tin Box Company vs. CIT (2001) 249 ITR 216 (SC) held that once it is established that the Assessing Officer had not given to the assessee an appropriate opportunity of being heard, that the assessee had an opportunity before the higher appellate authorities was really of no consequence, for it was the assessment order that counted inasmuch as the assessment order was required to be made only after the assessee had been allowed a reasonable opportunity of being heard.

Considered in the aforesaid light, in the present case it is axiomatic that so far as the issue of the adoption of Turnover filter of Rs.200 crores to exclude the aforesaid four concerns in concerned, the same has been adopted by the TPO without giving the assessee any opportunity of being heard and therefore in our view the matter ought to be remanded back to the AO/TPO for consideration afresh. We hold so. Thus, on this aspect also assessee succeeds for statistical purposes."

31. Following the aforesaid precedent, we therefore remand the matter

back to the file of the Assessing Officer/TPO for consideration afresh in the

light of our discussion in the order of the Tribunal dated 11.02.2015 (supra).

Thus, on this aspect assessee succeeds for statistical purposes.

32. By way of Ground of Appeal No.4.5, the appellant has assailed the

action of the TPO in excluding Sasken Communications Technologies Ltd. 21 ITA No.94/PN/2014

from the final set of comparables. As per the discussion in para 11(viii) of the

order of the TPO, it is noticed that the said concern has been excluded on the

ground that during the year under consideration it has undertaken business

restructuring. The Ld. Representative also pointed out that in the show-cause

notice dated 31.10.2012 issued by the TPO another reason has been

advanced which is to the effect that the said concern fails the export turnover

filter of 75% of the total turnover.

33. The Ld. Representative has assailed both the reasons advanced by the

TPO to reject the said concern from the final set of comparables. The Ld.

Representative has referred to an extract from the Annual Report of the said

concern placed in the Paper Book at page 1742 to point out that the said

concern has the following business segments - (i) Telecom Software

Services; (ii) Telecom Software Products; (iii) Network Engineering Services;

and, (iv) Automotive, Utilities and Industrial. The Ld. Representative pointed

out that it is only the Telecom Software Services Segment of the said concern

which is comparable to the Provision of software design and development

services being undertaken by the assessee for its associated enterprises. It

was pointed out that so far as the business restructuring referred by the TPO

is concerned, it relates to the segment at item (ii) i.e. Telecom Software

Products whereas the segment comparable to the assessee's tested activity is

item (i) i.e. Telecom Software Services which has not undergone any business

restructuring. On this basis, the point made out by the appellant is that the

TPO is misplaced in observing that the said concern is to be ignored on

account of business restructuring. The Ld. Representative pointed out that in

so far as the functional comparability of the said concern's, Telecom Software

Services segment with assessee's activity is concerned, there is no dispute.

With regard to the export turnover filter of the 75% of the total turnover the Ld.

Representative pointed out that before the TPO assessee had demonstrated 22 ITA No.94/PN/2014

that the export earnings of the said concern were otherwise 95% of the total

turnover.

34. On the other hand, the Ld. CIT-DR appearing for the Revenue has not

contested the factual matrix brought out by the Ld. Representative for the

assessee but has relied upon the discussion in the order of the TPO, which we

have already adverted to in earlier part of this order.

35. We have carefully considered the rival submissions. The submissions

put-forth by the assessee, based on the Annual Report of the said concern,

does not justify the assertions of the TPO that on account of business

restructuring the said concern's Telecom Software Services segment is to be

excluded from the list of comparables. In-fact, the business restructuring

undertaken by the said concern does not effect the segment of Telecom

Software Services which alone is stated to be comparable to assessee's

activity of Provision of software design and development services to

associated enterprises. Therefore, in our view, the reason advanced by the

TPO to exclude the said concern is not sustainable.

36. On this aspect, assessee submitted that the turnover of Telecom

Software Segment of the said concern is in excess of Rs.200 crores and

therefore if the criteria adopted by the TPO is to be applied, the said concern

would be excludible. On the application of the turnover filter, we have already

set-aside the matter back to the file of the TPO while considering the Ground

of Appeal No.4.6 of the assessee in the earlier paras. Therefore, the aforesaid

aspect of the matter shall be re-visited by the TPO/Assessing Officer in the

light of our decision in Ground of Appeal No.4.6. As a consequence, the said

dispute is also remanded back to the file of the Assessing Officer/TPO to be

decided in the light of the decision consequent to our direction in Ground of 23 ITA No.94/PN/2014

Appeal No.4.6. Thus, on this aspect also assessee succeeds for statistical

purposes.

37. By way of Ground of Appeal No.4.7, the plea of the assessee is for

inclusion of RS Software India Ltd. in the final set of comparables. The TPO

has excluded the said concern from the final set of comparables on the basis

of the stand of the DRP in the assessee's own case for earlier assessment

year 2008-09.

38. On this aspect, it was a common point between the parties that in

assessment year 2008-09 (supra), the Tribunal has upheld the stand of the

TPO in excluding M/s RS Software India Ltd. from the final set of

comparables. The Ld. Representative for the assessee quite fairly submitted

that following the precedent in the assessee's own case, the exclusion of the

said concern from the final set of comparables is liable to be affirmed. In view

of the decision of the Tribunal dated 11.02.2015 (supra) in the assessee's own

case, we hereby affirm the action of the TPO in excluding RS Software India

Ltd. from the final set of comparables. Thus, on this aspect assessee fails.

39. By way of Ground of Appeal No.4.8, the plea of the assessee is against

the action of the TPO in excluding (i) Akshay Software Technologies Ltd.; (ii)

Thinksoft Global Services Ltd.; and, (iii) Zylog Systems Limited from the final

set of comparables on the ground that the said concerns were predominantly

engaged in providing onsite services whereas assessee was providing

services to his clients as an offsite service provider. According to the TPO, the

business model of the said concern is not comparable to the assessee.

40. On this dispute, it was a common ground between the parties that in

assessment year 2008-09 (supra) in the assessee's own case, the Tribunal 24 ITA No.94/PN/2014

vide its order dated 11.02.2015 (supra) has held the issue against the

assessee wherein the following discussion is relevant :

"37. The next plea of the assessee is against the action of TPO in excluding Akshy Software Technologies Limited from the final set of comparables. The TPO has discussed the aspect of exclusion of Akshy Software Technologies Limited from the final set of comparables in para 15.1 of his order. As per the TPO, Akshy Software Technologies Limited is predominantly an on-site service provider whereby the said concern renders services at the clients site which is outside India, whereas, the assessee is rendering services to the clients as an off-shore service provider. According to the TPO, the margins in the on-site service model and the off-shore business model are not comparable.

38. The stand of the assessee before the lower authorities as well as before us is that it is a contract service provider engaged in providing software development services and regardless of the location, it is being compensated on the basis of cost plus mark-up and therefore, it could not be a ground for rejection of the said concern from the list of comparables. Before us, it is submitted that the mix of on-site and off-site activities are business exigencies and that such a factor cannot be considered as a filter for evaluating exclusion or inclusion of a comparable concern. The learned representative for the assessee referred to the written submissions made before the DRP, wherein it was contended that assessee's agreement with associated enterprise, does not restrict provision of on-site services and that even if assessee would have provided on-site services to its associated enterprise, then also it would have been remunerated on same basis, i.e. cost plus fixed mark-up by the associated enterprise. In sum and substance, the stand of the assessee is that such a filter cannot be applied to hold Akshy Software Technologies Limited as functionally incomparable.

39. The learned CIT-DR has reiterated the stand of the TPO as well the DRP and pointed out that the business model of providing on-site services at the place of the clients, is not comparable with off-shore rendering of services.

40. We have carefully considered the rival submissions. Factually speaking, Akshy Software Technologies Limited was found by the TPO to be predominantly engaged in rendering services to its client's on on-site basis. As per the TPO, Akshy Software Technologies Limited rendered services at client's site unlike the services being provided by the assessee through off- shore sites. The difference in operating mechanism of two business models is starkly evident. While under the on-site business model, the service provider positions its personnel on the client's site and on the other hand, in the off- shore business model, the service provider positions its personnel on its own site i.e. away from the site of the clients. The TPO in terms of his discussion in the order has attempted to deduce that the margins from on-site consultancy are lower when compared with margins from off-shore development work. He has also referred to an extract from McKinsey's research on Indian software industry competitiveness to say that because of the differences in costs between a developed country and India, it acts as motivator for the companies located in developed countries to increase its off- shore sourcing of services. In our considered opinion, whether on-site business model provides higher or lower margins in comparison with off-shore development work, is not the issue of consideration. The important point is 25 ITA No.94/PN/2014

that the business models are quite different. Ostensibly, the logistics and other aspects of the two business models cannot be treated on par and certainly it would impact the relative margins of the two business models. Therefore, in our considered opinion, the business model of the assessee i.e. provision of off-shore services to its associated enterprise stands on a different footing than the on-site services being rendered by Akshy Software Technologies Limited. The assertions of the assessee that its arrangement with associated enterprise does not rule out provision of on-site services does not distract from the fact that the tested transactions undertaken by the assessee involve off-shore rendering of services, which is incomparable to the on-site services being rendered by Akshy Software Technologies Limited to its clients abroad.

41. Before parting on this issue, we may also make a reference to the decision of Hyderabad Bench of the Tribunal in the case of DCIT Vs. M/s. Hellosoft India Pvt. Ltd. (ITA No.645/Hyd/2009, for assessment year 2005-06, dated 15.01.2013) relied upon by the assessee before us, and the following discussion has been referred to:-

"12. In view of the aforesaid, we uphold the decision of the CIT(A) in excluding companies whose turnover is more than Rs.100 crores. Similarly the CIT(A) is equally correct in not sustaining the rejection of comparables selected by the assessee by applying 'employee cost to sale' filter as relevant data / information for this filter are not available. Moreover, it is also a fact that part of the employee cost is included by many companies under different other heads. Selection of comparables applying the 'onsite income' filter also stands on the same footing as relevant data / information are not available in respect of all the companies in the database. It is also a fact that though the TPO has himself not applied this filter by observing that the companies having onsite income or more than 75% cannot be treated as comparables but two of the companies i.e. M/s. Foursoft Limited and Sankya Infotech Limited selected as comparables by the TPO were having onsite income / expenses of more than 75%. In this view of the matter, the CIT(A) was correct in holding that rejection of comparables selected by the assessee by applying this filter is not correct. We also fully subscribe to the view of the CIT(A) that loss making companies and companies having super normal profits cannot be considered as comparables in view of the ratio laid down in case of Mentor Graphics (India) Pvt. Ltd. Vs. DCIT (109 ITD 101) and Philips Software (119 TTJ

721). In aforesaid view of the matter, the companies selected by the CIT(A) as comparables is rational and appropriate in the facts of the present case. We therefore uphold the order of the CIT(A) in directing the Assessing Officer to compute the arithmetic mean of 11 comparables selected by him and determine the ALP after computing the adjusted average PLI. As result, grounds Nos.1,2 and 3 are dismissed."

[underlined for emphasis by us]

42. The aforesaid decision was relied for the proposition that on-site income filter could not be applied to reject certain companies from being considered as comparables. In this context, a perusal of decision of the Hyderabad Bench of the Tribunal dated 15.01.2013 (supra) reveals that the application of such filter was set-aside by the CIT(A) on the ground that the 26 ITA No.94/PN/2014

relative data / information was not available in respect of the comparables in question. The aforesaid decision of the CIT(A) was affirmed by the Tribunal and it is quite clear that there is no discussion as to whether or not such a filter is a relevant criteria to undertake comparability analysis. In the present case before us, it is not the case of the assessee that the application of on-site income criteria applied by the TPO can be defeated on the ground that the relevant information is not available. Therefore, in the present case, we have decided the issue on its own merits and the decision of the Hyderabad Bench of the Tribunal stands on a different footing. We are only trying to point out the aforesaid to say that the decision in the case of Akshy Software Technologies Limited (supra), no way contradicts our conclusion on this aspect in the earlier paras. Therefore, in our view, the TPO was justified in excluding Akshy Software Technologies Limited from the final set of comparables. Thus, on this aspect, the assessee has to fail."

41. Following the aforesaid precedent in the assessee's own case for

assessment year 2008-09 (supra), we hereby affirm the action of the TPO in

excluding (i) Akshay Software Technologies Ltd.; (ii) Thinksoft Global Services

Ltd.; and, (iii) Zylog Systems Limited from the final set of comparables. Thus,

on this aspect assessee fails.

42. By way of Ground of Appeal No.4.9, assessee has assailed the action

of the TPO in excluding Helios and Matheson Ltd. from the final set of

comparables. The TPO has excluded the said concern from the final set of

comparables on the ground that the Annual Accounts of the said concern

covered a period of 18 months whereas the comparable data should be for 12

months for reliable comparability.

43. In this context, the factual matrix is that assessee's financial year under

consideration is for the period 01.04.2008 to 31.03.2009 whereas the data of

the said concern available in public domain is of a different financial year i.e.

from 01.04.2008 to 30.09.2009, which comprises of a period of 18 months. In

this factual background, we find no error in the approach of the TPO in

excluding the said concern from the list of comparables because the financial

data of the said concern available in public domain does not correspond to the

financial year of the assessee under consideration. Ostensibly, rule 10B(4) of 27 ITA No.94/PN/2014

the Income Tax Rules, 1962 (in short "the Rules") provide that the data to be

used in analyzing the comparability of an uncontrolled transaction with the

international transaction shall be the data relating to the financial year in which

the international transactions have been entered into. Quite clearly, in the

present situation, the financial data of Helios and Matheson Ltd. available in

public domain does not conform to the financial year in which the international

transactions in question have been carried out by the assessee. Therefore,

the TPO justifiably excluded the said concern from the final set of

comparables, which we hereby affirm. Thus, assessee fails on Ground of

Appeal No.4.9.

44. Before parting, we may also deal with an Additional plea raised by the

assessee seeking exclusion of Bodhtree Consulting Ltd. from the final set of

comparables. According to the Ld. Representative for the assessee, the said

concern is liable to be excluded as it has abnormal trends in its profitability for

the year under consideration. According to the Ld. Representative for the

assessee, the said concern is an abnormally high profit making concern and

its margin for the year under consideration is 62.29%. It is contended that

abnormal high profit-making concerns ought to be excluded from the final set

of comparables as it would skew the results of the comparability analysis. It

was pointed out that assessee is a captive service provider and has

transacted only with associated enterprises and is being compensated on cost

plus agreed markup in respect of the software services rendered. The

assessee also does not bear the significant risks as compared to comparables

which are full risk bearing entities. Therefore, a concern which has abnormally

high level of profits or which witnesses wide fluctuations in profit margins over

a period of time should be excluded from the final set of comparables. In-

particular, reliance has been placed on the decision of the Bangalore Bench of

the Tribunal in the case of M/s Mindteck (India) Ltd. vs. DCIT vide IT(TP)A 28 ITA No.94/PN/2014

No.70/Bang/2014 dated 21.08.2014 wherein, under similar circumstances, M/s

Bodhtree Consulting Ltd. has been held to be excludible from the final set of

comparables on account of wide fluctuations in its margins over the years.

Reliance has also been placed on the decision of the Special Bench of the

Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. vs. ACIT vide

ITA No.7466/Mum/2012 dated 07.03.2014 in this context. The Ld.

Representative also pointed out that under identical circumstances M/s

Bodhtree Consulting Ltd. has been found to be excludible by the Pune Bench

of the Tribunal in the case of Q Logic (India) Pvt. Ltd. vs. DCIT vide ITA

No.227/PN/2014 dated 21.10.2014 and also in the case of PTC Software

(India) Pvt. Ltd. vs. DCIT vide ITA No.336/PN/2014 dated 31.10.2014.

45. The Ld. CIT-DR appearing for the Revenue vehemently pointed out that

the said concern has been considered as a comparable by the assessee in the

Transfer Pricing Study itself and therefore there was no justification for the

assessee to seek its exclusion at this stage.

46. We have carefully considered the rival submissions. Ostensibly, the

controversy as to whether abnormal profit-making concerns ought to be

excluded from the list of comparables or not, has been a subject matter of

consideration by the Special Bench of the Tribunal in the case of Maersk

Global Centres (India) Private Ltd. Vs. ACIT vide ITA No.7466/Mum/2012

dated 07.03.2014. The relevant observations of the Special Bench are as

under :-

"In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal 29 ITA No.94/PN/2014

business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin."

47. In terms of the aforesaid discussion by the Special Bench, it is clear

that a concern which has earned abnormally high profit margin cannot be

excluded straightaway but it would require further investigations to ascertain

the reasons for the high profit margin. It would be necessary to ascertain as to

whether the high profit margins reflect a normal business phenomenon or

whether it is a result of certain abnormal conditions prevailing in a particular

year. In order to do so, the profit margins earned by such a concern in the

proximate preceding and succeeding years would be required to be

considered. In this background of the matter, assessee has furnished before

us the operating margin trends of the said concern over six financial years i.e.

for three preceding years, current year and the two succeeding financial years.

On the basis of aforesaid tabulation, it is sought to be pointed out that there

exists wide fluctuation in profit margins which ostensibly does not reflect a

normal business phenomenon. We find that the Bangalore Bench of the

Tribunal in the case of M/s. Mindteck (India) Ltd. (supra) considered a similar

plea with respect to the exclusion of Bodhtree Consulting Ltd. on the ground of

it being a abnormally high profit making concern. The assessment year before

the Bangalore Bench was 2009-10, which is also the year before us. The

operative part of the order of the Bangalore Bench reads as under :-

"16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high.

30 ITA No.94/PN/2014 The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly."

48. The aforesaid discussion of the Bangalore Bench of the Tribunal shows

that the assessee is justified in ascertaining that margins of the said concern

for the year under consideration does not reflect a normal business trend and

therefore the inclusion of the said concern in the final set of comparables

would not lend credibility to the comparability analysis. The Bangalore Bench

in the case of Mindteck (India) Ltd. (supra) noted that the revenue recognition

method followed by the said concern was, the reason for the drastic variation

in profit margins of Botdtree Consulting Ltd., and thus upheld its exclusion

from the final set of comparables.

49. However, the plea raised by the Ld. CIT-DR is that the said concern

was initially included by the assessee in its Transfer Pricing Study as a

comparable and therefore assessee cannot seek its exclusion at this stage.

This aspect of the controversy has been considered by the Pune Bench of the

Tribunal in the case of Q Logic (India) Pvt. Ltd. (supra) in the following words :-

"16. In so far as the plea raised by the learned CIT-DR to the effect that the said concern was initially included by the assessee in its Transfer Pricing Study as a comparable is concerned, the appellant's Representative pointed out that in the Transfer Pricing Study, assessee had carried out the comparability analysis by adopting multiple year's data of the comparables which had off-set the wide fluctuations. However, the TPO has dis-agreed with the assessee on the adoption of multiple year's financial data of the comparables and instead, he has carried out the comparability analysis after adopting single year data of the comparables relatable to the period under 31 ITA No.94/PN/2014

consideration. It has also been submitted that the Chandigarh special Bench of the Tribunal in the case of DCIT vs. Quark Systems Private Ltd. (ITA No.100, 105/Chd/2009) (Chd) has held that if some inconsistency in a comparable exists, then it should be removed from the final list of comparables notwithstanding the fact that assessee had initially considered it as a comparable.

17. In our considered opinion, the plea of the assessee for exclusion of Bodhtree Consulting Ltd. from the final list of comparables cannot be shut out merely because the said comparable has been adopted by the assessee in its Transfer Pricing Study. So however, the aforesaid proposition is not an absolute proposition. In other words, it would be imperative for the assessee to justify exclusion of a concern from the list of comparables if in the initial Transfer Pricing Study undertaken by it, such a concern has been adopted as a comparable. In the present situation, case has been set up by the assessee for exclusion of Bodhtree Consulting Ltd on the ground that the profit margins of the said concern are fluctuating widely and are abnormally high for the period under consideration. Ostensibly, the financial data of the succeeding years which has been pressed into service by the assessee to demonstrate abnormal profit trends of the said concern was not available with the assessee at the time of carrying out its Transfer Pricing Study. Therefore, having regard to the facts and circumstances of the present case, in our view, assessee has justifiably demonstrated that the concern M/s. Bodhtree Consulting Ltd. is liable to be excluded from the final set of comparables, even though the said concern was considered as a comparable initially in its Transfer Pricing Study. Therefore, on this aspect, we conclude by holding that the concern, M/s. Bodhtree Consulting Ltd. be excluded from the final list of comparables for carrying out the comparability analysis. We hold so."

50. Following the aforesaid precedent, we therefore uphold assessee's plea

for exclusion of Bodhtree Consulting Ltd. from the final set of comparables,

even though the said concern was considered as a comparable initially by the

assessee in its Transfer Pricing Study. Thus, on this aspect assessee

succeeds.

51. In the result, we conclude by directing the Assessing Officer/TPO to re-

compute the arm's length price of the international transactions after

considering our aforesaid decision on various aspects of the matter. Needless

to say, the Assessing Officer/TPO shall allow the assessee a reasonable

opportunity of being heard before determining the arm's length price in relation

to the international transactions of Provision of software development services 32 ITA No.94/PN/2014

as per law and keeping in view our aforesaid directions. Thus, assessee

partly succeeds in this appeal.

52. In so far as the Ground of Appeal Nos.5, 6 and 7 are concerned, the

same have not pressed at the time of hearing and according the same are

dismissed as "Not Pressed".

53. Resultantly, the appeal of the assessee is partly allowed.

Order pronounced on 10 th April, 2015.

Sd/- Sd/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 10 th April, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The DRP, Pune; 4) The DIT (International Taxation), Pune; 5) The DR "A" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy// Assistant Registrar I.T.A.T., Pune