Tribunal excludes companies from comparables in software services, orders reassessment.

The Tribunal excluded Bodhtree Consulting Ltd., KALS Information Technology Systems Ltd., Infosys Technologies Ltd., Accentia Technologies Ltd., Cosmic Global Limited, and Eclerx Services Limited from the list of comparables for Software Development and ITes Services. The Tribunal set aside the previous order and instructed the AO/TPO to reassess the Arm's Length Price (ALP) for these services, granting the assessee a fair hearing in line with natural justice principles. The appeal was allowed for statistical purposes.

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Issues Involved:
1. Exclusion of Bodhtree Consulting Ltd. from the list of comparables for Software Development Services.
2. Exclusion of KALS Information Technology Systems Ltd. from the list of comparables for Software Development Services.
3. Exclusion of Infosys Technologies Ltd. from the list of comparables for Software Development Services.
4. Exclusion of Accentia Technologies Ltd. from the list of comparables for ITes Services.
5. Exclusion of Cosmic Global Limited from the list of comparables for ITes Services.
6. Exclusion of Eclerx Services Limited from the list of comparables for ITes Services.

Detailed Analysis:

Software Development Services Segment:

(A) Bodhtree Consulting Ltd.:
The assessee objected to the inclusion of Bodhtree Consulting Ltd. as a comparable, citing functional dissimilarity, extraordinary financial events, and fluctuating profit margins. The Tribunal, referencing its own decision in the assessee's case for the assessment year 2008-09, noted that Bodhtree Consulting Ltd. follows a different revenue recognition model. This model leads to fluctuating margins and distorts the operating profit figures. The Tribunal concluded that Bodhtree Consulting Ltd. should be excluded from the list of comparables.

(B) KALS Information Technology Systems Ltd.:
The assessee argued that KALS Information Technology Systems Ltd. is functionally different as it is engaged in the sale of software products and software services. The Tribunal, referring to its decision in the assessee's case for the assessment year 2008-09, found that KALS Information Technology Systems Ltd. is engaged in both software development services and software products, which makes it incomparable to the assessee, who provides only software services. Thus, the Tribunal directed the exclusion of KALS Information Technology Systems Ltd. from the list of comparables.

(C) Infosys Technologies Ltd.:
The assessee contended that Infosys Technologies Ltd. should be excluded due to its very high turnover, super profit-making status, and significant intangible assets. The Tribunal, referencing decisions from the Delhi Bench of the Tribunal and the Hon'ble Delhi High Court, agreed that Infosys Technologies Ltd. is not comparable due to its high turnover, R&D activities, and other factors. Consequently, Infosys Technologies Ltd. was excluded from the final list of comparables.

ITes Services Segment:

(D) Accentia Technologies Ltd.:
The assessee objected to the inclusion of Accentia Technologies Ltd., arguing that it provides KPO services, which are different from the BPO services provided by the assessee. The Tribunal, referencing the Hon'ble Bombay High Court's decision in the case of PTC Software (I) Pvt. Ltd., noted that Accentia Technologies Ltd. is functionally different and involved in activities such as developing its own software and rendering medical transcription services. Therefore, the Tribunal directed the exclusion of Accentia Technologies Ltd. from the list of comparables.

(E) Cosmic Global Limited:
The assessee argued that Cosmic Global Limited should be excluded due to its supernormal profits and significant outsourcing of work. The Tribunal, citing the Hon'ble Bombay High Court's decision in the case of PTC Software (I) Pvt. Ltd., agreed that Cosmic Global Limited is not functionally comparable due to its substantial outsourcing activities. Consequently, the Tribunal directed the exclusion of Cosmic Global Limited from the list of comparables.

(F) Eclerx Services Limited:
The assessee objected to the inclusion of Eclerx Services Limited, arguing that it provides KPO services, which are different from the BPO services provided by the assessee. The Tribunal, referencing the Hon'ble Bombay High Court's decision in the case of PTC Software (I) Pvt. Ltd., found that Eclerx Services Limited is engaged in providing high-end KPO services, making it incomparable to the assessee's BPO services. Therefore, the Tribunal directed the exclusion of Eclerx Services Limited from the list of comparables.

Conclusion:
The Tribunal set aside the impugned order and remitted the matter of determining the ALP of Software Development and ITes services afresh to the AO/TPO, directing them to grant a reasonable opportunity of hearing to the assessee in compliance with the principles of natural justice. The appeal of the assessee was allowed for statistical purposes.

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