TaxTMI 
TaxTMI 
TaxTMI 
2016 (8) TMI 1426
X X X X Extracts X X X X
X X X X Extracts X X X X
.... obtaining orders and for sending people abroad for training etc. These are clearly not incurred for the delivery of software outside India as your appellant did not render any onsite service and hence ought not to have been deducted while computing the export turnover. 2. Even if the view of the DCIT, that these are to be reduced from export turnover, is to be accepted for the sake of argument without conceding it, then this should be deducted from the calculation of Total Turnover also. The Deputy Commissioner has wrongly disallowed the claim of the assessee for a full deduction under Section 10A for all its profits and gains from the software business of the STPI unit at Bangalore by adopting as the denominator, total turnover of the business without deducting the expenditure on delivery of software outside India although export turnover which is the nominator was computed after reducing all these expenses ignoring the parity principle which ought to have been considered based on the decision of the jurisdictional High Court in the case of CIT Vs Tata Elxsi Limited (Karnataka High Court - 2011). 3. Total turnover ought to have been determined by adding other turnover if an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....preneurial risk borne by comparable companies who are independent service providers. It is operating under economic circumstances that warrant adjustments to the margins earned by the comparable companies, so as to make the comparison between the margins earned by the comparable companies and Softbrands appropriate. This view finds support in the decision of this Hon'ble Tribunal in the case of M/s. SAP Labs India Pvt. Ltd vs. ACIT. v) The TPO has not made any adjustments to the margins determined by him for the margins attributable to the marketing function carried on by the comparable companies as selected by him whereas your appellant do not carry out any marketing functions. Significant profits have to be attributed to this functional difference. Not making any adjustment for this is a major flaw in your analysis. The Hon ITAT has attributed 35% of the total margins as attributable to marketing function while disposing off the case of Rolls Royce PLC Vs. DDIT dated January 30th, 2009. He has also adopted a wide variety of companies enjoying margins in the range of 3.66% to 109.79%. This shows that the comparables selected by him are not comparable with each other, leave alon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e DRP in the Assessment Order is to be ordered to be deleted. Ground III For these and other grounds that may be adduced at the time of hearing, the order of the Deputy Commissioner of Income Tax may be modified to the extent appealed against." 3.1 Ground Nos.1 to 3 are regarding exclusion of the expenditure incurred in foreign currency from the export turnover for the purpose of computing the deduction under Section 10A of the Act. 3.2 We have heard the rival submission and perused the material on record. The Hon'ble Jurisdictional High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others 349 ITR 98 (Kar) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon'ble High Court reads as follows:- "...........Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such....
X X X X Extracts X X X X
X X X X Extracts X X X X
....' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". In the light of the above binding precedent, we direct the Assessing Officer/TPO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while computing deduct....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncomes which do not form part of total income. If the Parliament intended that the relief under s. 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses the sections like 80HHC, 80-IA, etc. The Parliament was aware of the various restricting and limiting provisions like s. 80A and s. 80AB which were in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates the intention of Parliament that it is to be regarded as an exemption and not a deduction. The Act of the Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. The Parliament despite being conversant with the implications of this chapter, has consciously chosen to retain s. 10A in Chapter III. 17. If s. 10A is to be given effect to as a deduction from the tot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sub-s. (2) of s. 33 and sub-s. (4) of s. 35 of the Act or the second proviso to cl. (ix) of sub-s. (1) of s. 36 shall not be applicable in relation to any such allowance or deduction. Similarly no loss as referred to in sub-s. (1) or in s. 72 or sub-s. (1) or sub-s. (3) of s. 74 insofar as such loss relates to the business of the undertaking was permitted to be carried forward or set off where such loss relates to any of the relevant assessment years. 21. It is in this background the Finance Act, 2003 was introduced by inserting the words "the year ending upto the first day of April, 2001", for that in cls. (1) and (2) of sub-s. (6) restricting the disallowance only upto the first day of April, 2001 and granting the benefit, of those provisions even in respect of units to which ss. 10A and 10B are applicable. The Finance Act, 2003, amended this subsection with retrospective effect from 1st April, 2001 by lifting the embargo in the aforesaid clauses in respect of depreciation and business loss relating to the asst. yr. 2001-02 onwards. The amendment indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ining unabsorbed at the end of the tax holiday period should be determined so that the same may be set off against the income post tax holiday period. 4.4 We further note that this view has been reiterated by the Hon'ble jurisdictional High Court in the case of M/s.Aurigene Discovery Technologies Ltd., in ITA No.549/13. A similar issue was considered by the co-ordinate bench of this Tribunal in the case M/s.Biocon Ltd. (supra) and held in para.23 to 26 as under: "23. We have given a very careful consideration to the rival submissions. The issue raised by the assessee in ground no.21 is identical to the ground raised by the assessee in Biocon (supra). The facts of the case before the Tribunal in the case of Biocon (supra) were that the assessee during the previous year had four units which were entitled to claim deduction u/s. 10B of the Act viz., CMZ Unit, SAP Unit, RHI Unit and IFP Unit. The assessee had claimed deduction u/s. 10B of the Act in respect of the aforesaid units totaling Rs. 157,22,33,066 which is the sum total of deduction u/s. 10B for the four units as follows:- (1) CMZ Unit : 6,87,70,229 (2) SAP Unit : 76,60,29,880 (3) RHI Unit : 52,42,56,278 (4) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IOL 24 ITAT (DEL) was also referred to by the CIT(A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT, 120 TTJ 956. The CIT(A) found that in the case of Global Vantage Pvt. Ltd. (supra) decided by the Delhi Tribunal this decision has been held to be not in tune with the decision of the Hon'ble High Court of Karnataka in the case of Himatsingike Seide Ltd. (supra). The CIT(A) also referred to the decision of the Chennai Bench of the Tribunal in the case of Sword Global India Pvt. Ltd. v. ITO, 306 ITR 286 (AT), wherein the provisions of section 10A and 10B have been held to be deduction provisions and not exemption provisions. For all the above reasons, the CIT(Appeals) confirmed the order of the Assessing Officer. Against the order of the CIT(A), the Assessee was in appeal before the Tribunal. 25. This Tribunal dealt with the issue in the following words : 63. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the eligible unit then the same should be allowed deduction u/s.10B of the Act without setting of the loss of non-eligible unit. The Hon'ble Karnataka High Court in the case of Yokogawa (supra) was concerned with similar situation as set out above. In view of the aforesaid decision of the Hon'ble Karnataka High Court, we are of the view that the claim as made by the Assessee for carry forward of loss of the noneligible unit had to be allowed without set off of profits of the 10A/10B unit. We hold accordingly and allow the relevant grounds of appeal of the Assessee. 66. We may also observe that the Hon'ble Karnataka High Court's decision in the case of Himatasingike Seide (supra) has held that unabsorbed depreciation (and business loss) of same (s. 10A/10B) unit brought forward from earlier years have to be set off against the profits before computing exempt profits. The assessee in that case set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forwa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me of the s. 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year's or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise. Therefore the decision of the Hon'ble Karnataka High Court in the case of Himatasingike Seide (supra) will not apply to the facts of the present case." 26. In view of the aforesaid decision, we are of the view that the claim made by the assessee deserves to be accepted. We may also observe that CBDT circular No.7 dated 16.07.2013, on the facts and circumstances of the present case is not a benevolent circular vis-àvis, the assessee, and therefore the decision to the contrary of the Hon'ble Karnataka High Court in the case of Yokogawa India (supra) will continue to apply. For the reasons given above, we direct the Assessing Officer to accept the claim of the assessee, as raised in ground no.21." 4.5 Accordingly by following the latest judgment of the Hon'ble jurisdictional High Court based on the substituted/amended provisions of sec.10A/10B which are applicable in the case of the assessee as well as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dispute regarding Transactional Net Margin Method ('TNMM') accepted as Most Appropriate Method ('MAM') as it was accepted in the earlier year by this Tribunal. The TPO rejected 19 out of 24 companies selected by the assessee and added 21 more companies by carrying out fresh search. Thus the TPO has considered total 26 comparable companies to determine the Arm's Length Price ('ALP') as under : Sl.No. Company Name Op to Total Cost % 1 Accel Transmatic Ltd. (Seg.) 21.11 2 Avani Cimcon Technologies Ltd. 52.59 3 Celestial Labs Ltd. 58.35 4 Datamatics Ltd. 1.38 5 E-Zest Solutions Ltd. 36.12 6 Flextronics Software Systems Ltd. (Seg.) 25.31 7 Geometric Ltd. (Seg.) 10.71 8 Helios & Matheson Information Technology Ltd. 36.63 9 I-Gate Global Solutions Ltd. 7.49 10 Infosys Technologies Ltd. 40.30 11 Ishir Infotech Ltd. 30.12 12 KALS Information Systems Ltd. (Seg.) 30.55 13 LGS Global Ltd. (Lanco Global Solutions Ltd.) 15.75 14 Lucid Software Ltd. 19.37 15 Mediasoft Solutions Ltd. 3.66 16 Megasoft Ltd. 60.23 17 Mindtree Ltd. 16.90 18 Persistent Systems Ltd. 24.52 19 Quintegra Solutions Ltd. 12.56 20 R S Software (India) Ltd. 13.47 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es providing activity of the assessee. Accordingly, we do not find any reason to interfere with the orders of the authorities below in rejeting this company. (ii) Hyper Soft Technology Ltd. a) The learned Authorised Representative of the assessee has submitted that this company provides strategic off shore development and software services including application, development and hence is functionally comparable with the assessee. b) On the other hand, the learned Departmental Representative has submitted that the TPO has rejected this company by noting the fact that it is a software product and trading company. Thus it is functionally different and is not comparable. c) We have considered the rival submissions as well as the relevant material on record. The TPO asked information from the company under Section 133(6) and in reply it was found that this company is a software product and trading company. This fact has not been disputed by the assessee by producing any record to contradict the findings of fact recorded by the TPO. In the absence of any material brought or produced before us to contradict the facts recorded by the TPO that this company is in software product and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lthcare equipment, consumer electronics, net working, CAD, Embedded Software Services, software testing, imaging technologies and reengineering software training. Therefore, this company is functionally different from the assessee and cannot be considered as comparable. In support of his contention he has relied upon the following decisions : i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 7.2 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 7.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that the comparability of this company to a software development services provider has been considered by the co29 ordinate bench of this Tribunal in the case of Trilogy E-Business Solutions dt.23.11.2012 for the Assessment Year....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." As far as the business activities of the company are concerned, the revenue has not disputed that this company is engaged in the diversified activity as recorded by the Tribunal in the earlier year. Accordingly, by following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP. (ii) Avani Cincom Ltd. 8. The learned Authorised Representative has submitted that the company is engaged in healthcare equipment, consumer electronics, net working, CAD, Embedded Software Services, software testing, imaging technologies and re31 engineering software training. Therefore, this company is functionally different from the assessee and cannot be considered as comparable. In support of his contention he has relied upon....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been given. We, therefore, reject this company also from taking into consideration for comparability analysis." " It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% " 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 ITAT (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." Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP. iii) Celestia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e- Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd that its turnover was in excess of Rs. 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 development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04-ITATPUNE- TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the aforecited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Dep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ftware 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 ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd.(supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es relied upon by the assessee as above. Accordingly, we do not find any substance or merit in the argument of the assessee that because of the turnover filter of this company should be excluded from the list of comparables. viii) Helios & Matheson Information Technology Ltd. 12. The learned Authorised Representative of the assessee has submitted that this company is enjoyed in the application integration, life cycle management and enterprise system management. It also provides a comprehensive range of support services for managing the IT Infrastructure of client. He has relied upon the decisions of the co-ordinate bench of the Tribunal as follows : (i) Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. (ii) PTC Software (India) Pvt. Ltd. Vs. ACIT (ITA No.1605/PN/2011). 12.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 12.2 We have considered the rival submissions as wel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oresaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." 30. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid company from the final list of comparable companies for the purpose of determining ALP." Respectfully following the decision of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP. ix) i-Gate Global Solutions Ltd. (Seg.) 13. The learned Authorised Representative of the assessee has submitted that this company is having a high turnover as incomparable to the assessee. Therefore this company enjoys economy of scale on the basis of the size of the operation. Therefore this company this company cannot be considered as a good comparable of the assessee. He has relied upon the following decisions : i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 13.1 On t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....: "22. The learned counsel for the assessee submitted that these two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. (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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tware services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the assessee against this company is incorrect computation of the operating margin by the TPO at 60.23%. The assessee claims that the correct margin of the company is 23.11% for this Assessment Year as considered by the Tribunal in the case of Trilogy E-Business Solutions Ltd. (supra). Thus the assessee has pleaded that the operating margin of Blue Ally division of this company is to be considered as comparable as operating margin of the said division alone should be considered. Since the assessee has disputed the correctness of the operating margin and relied upon the decision of the co-ordinate bench on this point accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the A.O./TPO to verify this aspect and the contention of the assessee in the light of the decision of the co-ordinate bench. xiii) Mindtree Ltd. 17. The learned Authorised Representative of the assessee has submitted that this company is having a high turnover as incomparable to the assessee. Therefore this company enjoys economy of scale on the basis of the size of the operation. Therefore this company this company cannot be considered as a good comparable of the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not be included in samples and extreme comparables mean not only the positive higher side but also the lower side. In the list of 22 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already considered that the agreement entered into by the assessee with its German associate concern has contemplated a compensation of cost plus 6 per cent, or 1.5 times of the total wages bill, whichever is higher. This point we have to consider in the light of the fact that the assessee is working in a risk mitigated environment. That is why we have agreed with the argument of the assessee-company that there may not be extreme profits in the case of the assessee. When extremes are excluded from the samples, all sorts of extremes should be avoided. Otherwise, samples selected for comparative study may not be representative." 33. Even in the aforesaid decision the point that has been emphasized is that when the margins of comparable companies are either extremely low or high, the approach should be to eliminate both and not consider only the high or low margin comparables as it suits either the TPO or the Assessee." High profit margin or....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....30.6.2015. (ii) Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 19.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 19.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in Trilogy E-Business Software India Pvt. Ltd. (supra) in paras 32 & 33 as under : " 32. We have considered the rival submissions. First we will consider the submission of the Assessee that companies with abnormal margins should not be regarded as comparable. In the case of Quark Systems Pvt. Ltd. (supra), the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows: "Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i) Infosys Ltd. xvii) Wipro Ltd. xviii) Tata Elxsi Ltd. (Seg.) 20. The learned Authorised Representative has submitted that the above three companies are not comparable to the assessee and all the three companies are leaders in the field and enjoys the brand value as well as bargain power of their huge size and dominance. In support of his contention he has relied upon the following decisions : (i) Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. (ii) Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 20.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that these companies are functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 20.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of these three companies have been considered by the co-ordinate bench of this Tribunal in Serial Innovations India Pvt. Ltd. (supra) in paras 25 & 26 as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. The argument put forth by assessee's is that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 14.0 (6) Tata Elxsi Ltd. 14.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 14.2 Before us, it was reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and ( c ) visual computing labs....