IT APPEAL NO. 1280 (BANG.) OF 2012
[ASSESSMENT YEAR 2008-09]

N.V. VASUDEVAN, JUDICIAL MEMBER AND JASON P. BOAZ, ACCOUNTANT MEMBER

Nageshwar Rao for the Appellant.
Farhat Hussain Qureshi for the Respondent.

ORDER

Jason P. Boaz, Accountant Member - This appeal by the assessee is directed against the order passed by the ITO, Ward 11(1), Bangalore under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (herein after referred to as 'the Act') dt.31.7.2012 in pursuance of the directions issued by the Dispute Resolution Panel ('DRP' in short) dt.25.6.2012. The relevant Assessment Year is 2008-09.

2. The facts of the case, in brief, are as under :

2.1 The assessee, a company is engaged in providing software development and support services to Curam Software Ltd. ('Curam Ireland'), its parent company. During the period relevant to Assessment Year 2008-09, the assessee provided software development and support service of Rs. 28,23,65,197 for Curam Ireland's commercial off-the-shelf products designed for human services, health, labour, etc. The assessee is registered as a 100% Export Oriented Unit ('EOU') under the Software Technology Parks of India ('STPI') Scheme. The assessee filed its return of income for Assessment Year 2008-09 on 26.9.2008 declaring taxable income of Rs. 20,16,360 after claiming deduction under section 10A of the Act amounting to Rs. 3,40,34,542. The assessee declared taxable income of Rs. 37,15,328 under section 115JB of the Act which was offset by the available tax credit. In the period under consideration, since the assessee entered into two international transactions, the Assessing Officer made a reference under section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arms' Length Price ('ALP') of these international transactions after obtaining necessary approval from the CIT, Bangalore-III. The TPO vide order under section 92CA of the Act dt.31.10.2011, proposed a T.P. adjustment of Rs. 2,45,79,840 to the ALP of international transactions. The Assessing Officer then issued a draft assessment order under section 143(3) r.w.s. 144C of the Act on 15.12.2011 -

(i)		proposing an addition on account of T.P. Adjustment to the ALP of Rs. 2,45,79,840 and
(ii)		Recomputation of the eligible deduction under section 10A of the Act by reducing communication charges of Rs. 10,57,458 and Foreign travel expenses of Rs. 1,43,12,209 incurred in foreign currency from export turnover without simultaneously reducing the same from total turnover.

2.2 Aggrieved by the draft assessment order for Assessment Year 2008-09 dt.15.12.2011, the assessee filed its objection thereto before the DRP, Bangalore. The DRP vide order under section 144C(5) r.w.s. 144C(8) of the Act dt.25.6.2012 agreed with the views / findings of the A.O. / T.P.O. and rejected the objections / contentions raised by the assessee. In consequence of the directions the order of the DRP dt.25.6.2012, the Assessing Officer passed the order of assessment for Assessment Year 2008-09 by an order 143(3) r.w.s. 144C (13) of the Act dt.31.7.2012.

3. Aggrieved by the order of assessment for Assessment Year 2008-09 dt.31.7.2012, the assessee is in appeal before us raising the following grounds :—
"General

1.		The order of the learned Assessing Officer and directions of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law.
2.		On the facts and in the circumstances of the case and in law and based on the directions of DRP, the learned Assessing Officer erred in assessing the total income of the appellant at Rs. 29,818,242 as against returned income of Rs. 3,279,195, computed by the appellant.
		Corporate tax grounds
3.		Based on the directions of Hon'ble DRP, the learned Assessing Officer erred in holding that the communication expenses and foreign currency expenses of computer software outside India and should be reduced from export turnover while computing the deduction under section 10A of the Act.
4.		Based on the directions of Hon'ble DRP, the learned Assessing Officer erred in law by not considering the alternative plea of the appellant that, if the communication expenses and foreign currency expenses attributable to the delivery of computer software outside India are reduced from export turnover, an equal amount should also be reduced from total turnover for computing the deduction under section 10A of the Act.
		Transfer Pricing grounds
5.		The learned Assessing Officer/Transfer Pricing Officer (TPO) erred in making an addition of Rs. 2,45,79,840, to the total income of the appellant on account of adjustment in the arm's length price with respect to the software development services transaction entered into by the appellant with its associated enterprise.
6.		The learned TPO and the learned Assessing Officer have erred, in law and in facts, by not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the appellant's international transaction is not at arm's length.
7.		The learned TPO and the learned Assessing Officer have erred, in law and in facts, by determining the arm's length margin / price using only FY 2007-08 data which was not entirely available to the appellant at the time of complying with the transfer pricing documentation requirements.
8.		The learned TPO and the learned Assessing Officer have erred, in law and in facts, by rejecting certain comparable companies identified by the appellant in the comparability analysis by applying different quantitative and qualitative filters as stated below :

(a)		the learned AO/TPO erred in rejecting certain comparable companies identified by the appellant where consolidated results had been used for analysis.
(b)		the learned AO/TPO erred in rejecting certain comparable companies identified by the appellant using turnover Rs.1 Crore as a comparability criterion.
(c)		the learned AO/TPO erred in rejecting certain comparable companies identified by the appellant as having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend); and
(d)		the learned AO/TPO erred in rejecting certain comparable companies identified by the appellant on the ground that the comparables were having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months).

9.		The learned AO/TPO erred in rejecting comparables identified by the appellant using 'onsite revenues greater than 75% of the export revenues' as a comparability criterion.
10.		The learned AO/TPO erred in rejecting comparables identified by the appellant using 'employee cost greater than 25% of the total revenues' as a comparability criterion.
11.		The learned TPO erred in obtaining information which was not available in public domain by exercising powers under section 133(6) of the Act and relying on such information for comparability analysis.
12.		The learned TPO and the learned Assessing Officer have erred, in law and in facts, by accepting / rejecting companies based on unreasonable comparability criteria.
13.		The learned TPO and the learned Assessing Officer have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the appellant vis-à-vis the comparables.
14.		The learned Assessing Officer/ TPO erred in not considering the foreign exchange fluctuation gain (loss) as operating in nature while computing the operating margin of tested party and comparable companies.
15.		The learned TPO and the learned Assessing Officer have erred, in law and facts, by wrongly computing the operating margins of some of the comparable companies identified in the TP order.
16.		The learned TPO and the learned Assessing Officer have erred, in law and facts, in computing the ALP without giving benefit of +/- 5% under the proviso to section 92C of the Act.
17.		The learned Assessing Officer has erred, in law and facts, in levying interest of Rs. 3,762,314 and Rs. 76,599 under sections 234B & 234C of the Act respectively.
18.		The learned erred, in law and in facts, in initiating penalty proceedings under section 271(1)(c) of the Act."

4. The grounds raised at S.Nos.1 and 2 being general in nature and not urged before us, no adjudication, therefore, called for thereon.
5. CORPORATE TAX GROUNDS (Ground Nos.3 & 4)

5.1 In the grounds raised at S. No. 3 is the issue of reducing communication expenses and foreign travel expenses incurred in foreign currency from export turnover while computing the eligible deduction under section 10A of the Act.

In the ground at S. No. 4, the assessee contends that if these expenses are to be excluded from the export turnover, then they should be excluded from the total turnover also.
5.2 We have heard both sides and carefully perused and considered the material on record. on this very issue, the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 17 taxmann.com 100/204 Taxman 321, has held that while computing the deduction under section 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, then the same should also be excluded from the total turnover in the denominator. The relevant operative portion of the finding of the Hon'ble jurisdictional High Court is extracted and reproduced as under :

"if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover in the denominator also. The reason being that the total turnover includes export turnover. The components of the export turnover in the numerator and denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10-A, 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. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes 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. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the 'total turnover' means, then, when the 'total turnover' includes 'export turnover', the meaning assigned by the legislature to the 'export turnover' is to be respected and given effect to, while interpreting the 'total turnover' which is inclusive of the 'export turnover'. Therefore the formula for computation of the deduction under section 10A, would be as under :

	Profits of the business	x	Export turnover of the undertaking
			(Export turnover + domestic turnover) Total Turnover."

In the light of the above facts and respectfully following the decision of the Hon'ble Karntaka High Court in the case of Tata Elxsi Ltd. (supra), we direct the Assessing Officer to exclude the above mentioned expenses on communication and travel incurred in foreign currency both from export turnover as well as from the total turnover while calculating the eligible deduction under section 10A of the Act.

TRANSFER PRICING (GROUNDS 5 TO 16)
6.1 In the course of proceedings before us, the learned Authorised Representative submitted that the assessee would not urge or press the general grounds and would like to make submissions only on the comparability of the individual companies chosen by the TPO and those companies chosen by the assessee which were rejected by the TPO as comparables.

6.2 In the light of the above, we now briefly examine the grounds of appeal at S. Nos. 5 to 16.

Ground No. 5
This ground being general in nature, no adjudication is called for thereon.

Ground No. 6
This ground is raised in respect of the TPO rejecting the assessee T.P. Study and conducting a fresh search for deciding the comparable companies.
As the learned Authorised Representative had submitted the assessee would not press the general grounds, no separate adjudication is called for thereon. We will, however, later in this order, be dealing with the assessee's submissions / contentions raised in respect of individual comparables chosen by the TPO and in respect of companies chosen by the assessee in its T.P. Study but rejected by the TPO while finalizing the list of comparable companies.

Ground No. 7
This ground is raised by the assessee challenging the use of single year data by the TPO in the course of his fresh search for selecting comparable companies. As the learned Authorised Representative has submitted that this is a general ground, there is no need for adjudication thereon. Even otherwise, the ground of the assessee is liable to be dismissed in view of the mandatory provisions of Rule 10B(4) of the IT Rules, 1962 which require the use of data of the current financial year to conduct the comparability analysis at the time of TP Audit. In this view of the matter and also due to the assessee's failure to establish before us TPO / DRP how earlier years data had an influence on the prices of the current financial year, we dismiss this ground of the assessee.

Ground No. 8
This ground is raised in respect of the rejection of certain comparable cases by the TPO which were chosen by the assessee. As we will be considering and examining the comparability or otherwise of individual companies as raised by the assessee before us, there is no requirement for adjudication on this general ground.
Further, before us, the learned Authorised Representative has specifically stated that the ground raised at 8(b) in respect of the turnover filter is not pressed and it is therefore dismissed as not pressed.

Ground No. 9
This ground is raised in respect of the use of on-site filter of "on-site revenues greater than 75% of the export revenues."
As the learned Authorised Representative had submitted that the assessee would not press this general ground raised, this ground requires no specific adjudication as it would be dealt with, if necessary, in the course of examination of individual comparable companies raised by the assessee in this appeal.

Ground No. 10
This ground is raised in respect of the use of employee cost filter as "employee cost greater than 25% of the total revenue."
As the learned Authorised Representative has submitted that the assessee is not pressing the general grounds, this ground requires no specific adjudication as this issue would be considered, if necessary, in the course of examination of individual comparables raised by the assessee.

Ground No. 11
This ground is raised in respect of the use of information obtained under section 133(6) of the Act by the TPO for deciding the comparability of companies.
As the learned Authorised Representative has submitted that the assessee is not pressing the general grounds, this ground requires no specific adjudication as this issue would be considered if necessary, in the course of examination of individual comparables raised by the assessee in this appeal.

Ground No. 12
Since this ground is general in nature, no adjudication is required thereon.

Ground No. 13
This ground is raised in respect of the grant of suitable adjustments towards differences in the risk profile between the assessee and the comparable companies.
This ground was argued before us by the learned Authorised Representative and this issue is separately discussed in the later part of this order.

Ground No. 14
This ground is raised in respect of non-consideration of foreign exchange loss / gain as part of operating loss / gain.
This ground was argued before us by the learned Authorised Representative and is considered separately in the later part of this order.

Ground No. 15
This ground is raised regarding mistakes in computing the operating margin of some comparable companies.
This ground was argued before us by the learned Authorised Representative and is considered in the later part of this order when examining the comparability of companies referred to by the assessee in this appeal.

Ground No. 16
This ground raised by the assessee is in respect of being given the benefit of + / - 5% while computing the ALP.
Before us this ground was not pressed. Even otherwise, the retrospective amendment to section 92C(2A) of the Act brought about by the Finance Act, 2012 has settled the issue and therefore the benefit of 5% is not allowable to the assessee. In this view of the matter, this ground raised by the assessee is dismissed.
7. Assessee's list of comparable companies.

7.1 As per the T.P. Study carried out by the assessee using TNMM as the Most Appropriate Method (MAM), the list of 23 comparable companies chosen by the assessee are as under :

Sl.No.	Name of the Company	Weighted average of operating profits on operating costs (%)
1	Akshay Software Technologies Limited	6.60
2	Aztecsoft Limited	18.16
3	Goldstone Technologies Limited	11.50
4	Helios & Matheson Information Technology Ltd	38.40
5	Indium Software (India) Limited	11.09
6	Infosys Technologies Limited	39.96
7	KPIT Cummins Infosystems Limited	13.20
8	Lanco Global Systems Limited	13.28
9	Larsen & Toubro Infotech Limited	11.35
10	Maars Software International Limited	15.58
11	Metstar InformationTechnologies Limited	3.46
12	Mindtree Limited	16.98
13	Persistent Systems Private Limtied	24.34
14	Quintegra Solutions Limited	15.18
15	R S Software (India) Limited	14.11
16	SIP Technologies and Exports Limited	18.37
17	Sasken Communication Technologies Limited	17.88
18	Satyam Computers Services Limited	29.43
19	TVS Infotech Limited	-21.27
20	VJIL Consulting Limited	5.85
21	VMF Softech Limited	4.32
22	Visualsoft Technologies Limited	16.76
23	Zylong Systems Limited	16.87
	Arithmetic mean	14.84
	Lower Ranhe (-)5%	9.10
	Upper Range (+) 5%	20.58

7.2 The TPO observed that the assessee has characterized itself as a provider of software development services to its Associated Enterprises (AE) and that the assessee used TNMM as the MAM. While accepting the TNMM as the MAM, the TPO rejected the assessee's TP Study for various reasons set out in the show cause notice issued and embarked on a fresh search using the data bases 'Prowess' and 'Capital'. After considering the objections of the assessee, the TPO selected a final set of 20 comparables which are as under :

Sl.No.	Name of the company	OP/TC %
1	Avani Cincom Technologies	25.62
2	Bodhtree Consulting Ltd	18.72
3	Celestial Biolabs	87.94
4	e-zest Solutions Ltd.	29.81
5	Flextronics (Aricent)	7.86
6	iGate Global Solution Ltd.	13.99
7	Infosys	40.37
8	Kals Information Systems Ltd (Seg)	41.94
9	LGS Global Ltd.	27.52
10	Mindtree Ltd (seg)	16.41
11	Persistent Systems Ltd.	20.31
12	Quintegra Solution Ltd.	21.74
13	R Systems International (Seg)	15.30
14	R S Software (India) Ltd.	7.41
15	Sasken Communication Technologies Ltd. (Seg)	7.58
16	Tata Elxsi (Seg)	18.97
17	Thirdware Solution Ltd.	19.35
18	Wipro Ltd. (Seg)	28.45
19	Softsol India Ltd.	17.89
20	Lucid Software Ltd.	16.50
	AVERAGE	23.65

The Average Mean Margin of the 20 comparable companies selected by the TPO was 23.65% whereas the Average Mean Margin of the assessee was 10.94%. After allowing the assessee Working Capital Adjustment of 2.55%, the TPO worked out the adjusted Mean Margin of the comparables at 21.10% and accordingly worked out the TP Adjustment of Rs. 2,45,79,840 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09.

8. As mentioned in pre-paras 6.1 and 6.2 of this order, in the course of proceedings before us, the learned Authorised Representative submitted that he would make and put forth arguments / contentions only on the comparability or otherwise of individual companies, which in his opinion, are incorrectly included by the TPO in the set of comparable companies, or are incorrectly excluded by the TPO from out of the set of comparable companies chosen by the assessee in its TP Study. The learned Authorised Representative also submitted a chart, schematically explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected or rejected by the TPO as comparable companies to the assessee.

We now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart.
A. Companies incorrectly adopted by the TPO as per the contentions of the assessee.
9. (1) Avani Cimcon Technologies Ltd.
9.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly.

9.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions :

(i)		Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 29 taxmann.com 310/140 ITD 540 (Bang. - Trib)
(ii)		Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 22 taxmann.com 96/137 ITD 1 (Mum.)

9.3 Per contra, the learned Departmental Representative supported the inclusion of the aforesaid company in the final list of comparables by the TPO. The learned Departmental Representative argued that the ruling of the co-ordinate bench in the case of Trilogy E- Business Software India (P.) Ltd. (supra) relied on by the assessee was rendered in the factual context of the position that existed for Financial Year 2006-07 vis-à-vis this comparable company and Trilogy E-Business Software India (P.) Ltd.(supra) and there cannot be an assumption that it would continue to be applicable for F.Y. 2007-08 that too vis-à-vis the assessee, in the case on hand, which is a different entity from Triology E-Business Software India (P.) Ltd.

9.4 The learned Authorised Representative, in rejoinder to the submissions of the learned Departmental Representative, contended that the functional profile of the comparable company continues to remain the same for this year also i.e. software products, whereas the assessee in the case on hand provided software development and support services to its AE and therefore it was clearly functionally different. The learned Authorised Representative also reiterated the submissions made earlier that the Annual Report of the comparable company in the public domain was not complete and that the information received by the TPO under section 133(6) of the Act has not been shared with the assessee.

9.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable.

9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology E-Business Software India (P.) Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India (P.) Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :-

(i)		The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Triology case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable.
(ii)		After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software India (P.) Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09.

9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology E-Business Software India (P.) Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Triology E-Business Software India (P.) Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly.

10. (2) Celestial Biolabs Ltd.
10.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company.

10.2.1 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee as it is into bio-informatics, software product / services and the segmental break up is not provided. The assessee has extensively quoted from various parts of the Annual Report of the company, which states as under :

'(i)		"Mission Statement" on page 2 of the Annual Report states that the company is also into bio-informatics products, ITES, Etc.,
		"Celestial is committed to be a technology company respected globally for its software development, products, services in the area of Bio-informatics, Enterprise Resources Planning, Information Technology and Information Technology Enables Services" (emphasis supplied).
(ii)		The "Future Outlook" in the Directors Report of the Annual Report indicates that the company is into large scale development of bio tech products.
		" …. Your company is setting up a manufacturing facility to manufacture Industrial Enzymes, Active Pharmaceuticals Ingredients and Herbal Pharmaceuticals. …."
(iii)		"Public Issue" in the Directors Report on page 13 of the Annual Report states :-
		"…… The company has raised Rs. 30 Crores for production of Enzymes, Bio Tech Products and Drug Molecule Development, etc., with an estimated project cost of Rs. 50 Crores."
(iv)		"Financials" in Management Discussion & Analysis on page 16 of the Annual Report states :-
		" ….. The company has achieved a turnover of Rs. 2,021.12 lakhs from sales and services against the turnover of Rs. 1,412.76 lakhs in the previous fiscal year. The sales are higher by 608.36%. The growth has been achieved through services made in Bio-technology, Implementations, Product Development, I T Enabled Services and also through rational spending in costs…."
(v)		"Business Analysis" in the Management Discussion & Analysis on page 16 of the Annual Report states :-
		"Products
		The company has developed Taxability Prediction tool "CLL-TOX" to predict the toxicity of a given molecule. Your company filed IPR by filing under the Copyright / Patent Act (Appraised and funded by Department of Scientific & Industrial Research.)
		The company has developed an ERP product "CELL VISION" using Microsoft Technologies. Cell Vision is a custom implemented product which caters to the needs of many industrial segments. The company is foreseeing good reserves during the years to come. Your company also developed a portal called Sanjeevani India.Com."
(vi)		Schedule 7 of the financial statements on page 25 of the Annual Report indicates that the company has significant product development expenditure pertaining to Drug Molecule and Celsuite.
(vii)		"Turnover" under "Notes on Accounts" for financial statements on page 35 of the Annual Report states that the turnover from "bio informatics services, data warehousing and mixing, software development, products and services" for F.Y. 2007-08 is 2021.12 lakhs.

10.2.2 The assessee also placed reliance in support of its stand that this company be excluded from the list of comparable companies on the following decisions of the co-ordinate benches of this Tribunal :-

(i)		Triology E-Business Software India (P.) Ltd. (supra)
(ii)		Mercedes Benz Research & Development India (P.) Ltd. v. Dy. CIT [IT (T.P.) Appeal No. 1222 (Bang.) of 2011, dated 22-2-2013]

10.3 Per contra, the learned Departmental Representative contended that the ruling in the case of Triology E-Business Software India (P.) Ltd. (supra) was rendered with respect to F.Y.2006-07 and there cannot be an assumption or presumption that it would continue to be applicable to F.Y. 2007-08 as well.

10.4 To this, the learned Authorised Representative countered that the functional profile of this company continues to remain the same for F.Y. 2007-08 as it was in F.Y. 2006-07 and the same is evident from the Annual Report quoted extensively above at para 10.2.1 (supra).

10.5.1 We have heard both parties and carefully perused and considered the material on record including the judicial decisions cited. As discussed earlier, there is merit in the contention of the learned Departmental Representative that the ruling of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India (P.) Ltd. (supra), was with respect to the facts relevant to an earlier financial year and there cannot be an assumption that it would continue to be applicable to all other assessee's for this year as well. At the same time, we find that the TPO also seems to have selected this company as a comparable, based on the reasoning given in the TPO's order for the earlier year i.e. F.Y. 2006-07. Evidently, in this view of the matter, the TPO has not conducted any independent FAR analysis for this company for the year under consideration and therefore the selection process adopted by the TPO is defective.

10.5.2 Further, besides relying on the decision of the co-ordinate bench in the case of Triology E-Business Software India (P.) Ltd. (supra), the assessee has demonstrated that the finding given therein for Assessment Year 2007-08 is applicable for this year also. Further, the assessee has also brought on record substantial evidence by quoting from various portions of the Annual Report that this company is functionally different from the assessee and hence is not comparable to the assessee in the case on hand. We agree with the submissions made by the assessee, that as per the details from the Annual Report of this company, it is functionally different from the assessee. In view of the fact that the financial profile and other parameters of this company have not changed during the year under consideration, which fact has been demonstrated by the assessee, following the decision of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India (P.) Ltd. (supra), we hold that the company ought to be excluded from the list of comparables. It is ordered accordingly.

11. (3) KALS Information Systems Ltd.
11.1 This 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 the grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter.

11.2 Before us, the assessee contended that this company is not functionally comparable, as it is into software products. The assessee had also submitted that :—

(i)		this company has two segments namely ; Application Software Segment which includes software product revenues, while the 'Training Segment' does not have any product revenue.
(ii)		from the Annual Report of KALS for the year ended 31.3.2008; i.e. the year under consideration, it is observed that the company is into provision of software development services as well as sale of software products.
		"Inventories" under schedule to the financial statements on page 16 of the Annual Report discloses "Software Development" as inventory and work-in-progress. It is to be noted that a pure software development service provider would not be able to disclose such details as it does not carry any such inventory or work-in-progress.
		"Background" under the Schedules to the financial statements on page 18 of the Annual Report states :-
		"The company is engaged in development of software and software products since its inception. This company consisting of STPI unit engaged in Development of Software and Software Products and a Training Centre engaged in training of software professionals on online projects" (emphasis provided)
		"Revenue Recognition" under Notes to the financial statements on page 18 of the Annual Report states :-
		"The company derives its revenues primarily from software services and software products."
(iii)		As per the Website of KALS, the company has developed two products, namely; 'Virtual Insure' and 'La-Vision' establishing the fact that KALS earns revenues from the development of software products.
(iv)		The segmental information provided under 'Notes on Accounts' of the Annual Report provides the break-up of revenues from two segments, namely 'Application Software' and 'Training' which shows that revenue from software products forms part of Application Software and there are no segmental details.
(v)		The assessee also placed reliance on the judicial decisions rendered in the following cases :

(a)		Triology E-Business Software India (P.) Ltd. (supra)
(b)		Mercedes Benz Research & Development India (P.) Ltd. (supra).

11.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India (P.) Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details called out from the Annual Report and quoted above (supra).

11.4 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. As discussed earlier in this order, there is merit in the contention of the learned Departmental Representative that the ruling rendered in the case of Triology E-Business India (P.) Ltd. (supra) was with respect to an earlier period i.e. F.Y. 2006-07 and there cannot be an assumption or presumption that it is applicable for the year under consideration as well. At the same time, we find that the TPO has drawn conclusions on the basis of information obtained under section 133(6) of the Act, which was not in the public domain and could not have been used by the TPO, when the same is contrary to the Annual Report of the company as has been highlighted by the assessee in its submissions. We also find that the co-ordinate bench of this Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) has held that this company was developing software products and was not purely or mainly a software development service provider. Further, apart from relying on the decision of Trilogy E-Business Software India (P.) Ltd. (supra), the assessee has brought on record substantial evidence quoting from various portions of the Annual Report of that this company is functionally dis-similar and different from the assessee and hence is not comparable and therefore the finding rendered in respect of this company in the case of Trilogy E-Business Software India (P.) Ltd. (supra) for Assessment Year 2007-08 is applicable for this year i.e. Assessment Year 2008-09 also. In view of the facts and circumstances of the case as discussed above, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the set of comparable companies.

12. (4) Infosys Technologies Ltd.

12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment.

12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :-

(i)		The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US.
(ii)		This company has substantial revenues from software products and the break-up of the software product revenues is not available.
(iii)		This company has incurred huge research and development expenditure to the tune of approximately Rs. 200 Crores.
(iv)		This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems.
(v)		The assessee also placed reliance on the following judicial decisions :-

(a)		ITAT, Delhi Bench decision in the case of Agnity India Technologies India (P.) Ltd. v. ITO [IT Appeal No. 3856 (Delhi) of 2010, dated 4-11-2010] and
(b)		Trilogy E-Business Software India (P.) Ltd. (supra)

12.3 Per contra, opposing the contentions of the assessee, 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 (P.) 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 comparable companies. It is ordered accordingly.

13. (5) Wipro Limited
13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables.

13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under :

(i)		This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made.
(ii)		The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO's own filter of rejecting companies with consolidated financial statements.

13.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables.

13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison.

13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344/28 taxmann.com 258 (Bang.) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible 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 (P.) 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. (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.

In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables.

14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables.

14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee.

14.4.2 The Hon'ble Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :-

" …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion."

As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi (supra) have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.

B. COMPANIES REJECTED BY THE T.P.O.
15. (7) Indian Software (India) Ltd.

15.1 This company was selected as a comparable by the assessee. The TPO, however, rejected this company as a comparable for the reason that it fails the export revenue filter adopted by him. Before us, the assessee contended that the TPO has erred in computing the export revenue filter. As per the assessee, it does not fail the export revenue filter as the actual quantum of its export revenue is 37%.

15.2 Per contra, the learned Departmental Representative supported the action of the TPO in rejecting this company from inclusion in the set of comparables.
15.3 We have heard both parties and carefully considered the material on record. We find that the TPO in his order had not explained as to how this company has failed the export filter. In this view of the matter, we deem it fit to remand the issue the comparability of this company vis-à-vis the assessee for examination of the computation given by the assessee and to thereafter decide the issue afresh. The TPO is directed to afford the assessee adequate opportunity of being heard and to make its submissions in the matter which maybe duly considered before a decision is taken thereon.

16. (8) VMF Softech Limited
16.1 This company was selected as a comparable by the assessee but was rejected by the TPO on the ground that it fails the export revenue filter adopted by the TPO.
16.2 Before us, the assessee contends that the TPO erred in computing the export revenues filter. As per the assessee, it does not fail the export revenue filter as the actual quantum of its export revenue is 94.36%.

16.3 We have heard both parties and carefully considered the material on record. we find from the record that the TPO has not explained in his order as to how this company has failed the export revenue filter applied by him. In this view of the matter, in the interest of justice and equity, we deem it fit to remand the issue of the comparability of this company to the file of the TPO so that he may examine the computation given by the assessee and decide the issue afresh. The TPO is directed to afford the assessee adequate opportunity of being heard and make submissions in the matter, which maybe duly considered before a decision is rendered. It is ordered accordingly.

17. (9) KPIT Cummins Infosystems Ltd.
17.1 This company was selected by the assessee as a comparable but was rejected by the TPO on the ground that it fails the RPT filter on a stand alone basis, as consolidated financials cannot be accepted.

17.2 Before us, the assessee contended that the TPO has erred in computing the RPT filter. It was submitted that the company did not fail the RPT filters, if the computation is done on a consolidated basis. The assessee submitted that the TPO has done the computation on a consolidated basis in the case of Wipro Ltd. and hence should have adopted the same basis in the case of this company also.

17.3 We have heard the submissions of both the learned Departmental Representative for revenue and the learned Authorised Representative for the assessee. We find from the record that the TPO has neither explained the computation in the order nor has the TPO explained how the RPT filter fails in this case. However, we do not find the contention of the assessee, that the computation has to be done on a consolidated basis, to be acceptable. This is for the reason that when he comparability is between the specific segments, there is no requirement to take the consolidated financials for the computation. We agree with the view of the TPO that the computation of the RPT filter has to be on a standalone basis. With this finding, we restore the issue back to the file of the Assessing Officer/TPO to make the computation on stand along basis, taking into consideration the decisions rendered by the co-ordinate bench of this Tribunal in this regard.

C. ADDITIONAL COMPANIES TO BE CONSIDERED FOR INCLUSION IN THE LIST OF COMPARABLES.

18. (10) Aztec Software & Technology Ltd.

18.1 This company was selected as a comparable by the assessee but was rejected by the TPO on the ground that it fails the export revenue filter adopted by the TPO.
18.2 Before us, the assessee contended that the TPO has erred in computing the export revenue filter. As per the assessee, it does not fail the export revenue filter since the actual quantum of its export revenue is 89.44%. From the material on record, we find that the TPO in his order has not explained as to how this company fails the revenue filter. In this view of the matter, we deem it fit to restore the issue of comparability of this company back to the file of the TPO to examine the computation given by the assessee and decide the issue afresh after affording the assessee adequate opportunity of being heard and to make submissions in the matter which may be duly considered before a decision is taken.

19. (11) Larsen & Toubro Infotech Ltd.
19.1 This company was selected as a comparable by the assessee but was rejected by the TPO on the ground that it fails the 25% RPT filter.
19.2 Before us, the assessee contended that this company does not fail the RPT filter. It was submitted that the computation done by the TPO was erroneous and the actual computation of RPT is 19.7% for this company.

19.3.1 We have heard both parties and carefully considered the material on record. There are a number of decisions of the co-ordinate benches of this Tribunal wherein the threshold limit for the RPT filter has been taken variously between 25% and 15%. However, in the latest case on the subject, the threshold limit has been taken at 25%. We, therefore, respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Support Soft India P. Ltd. (ITA No.1372/Bang/2011 dt.28.3.2013) hold that the threshold limit for RPT filter should be taken as 25%.

19.3.2 We, however, find that the TPO has not explained in his order as to how this company fails the RPT filter and has neither given the computation nor explained the same. On the other hand, the assessee has computed the RPT of this company at 19.7%. In view of the above, we deem it to be in the fitness of things to restore the issue back to the file of the Assessing Officer/TPO to compute the RPT correctly, taking into account the submissions of the assessee in this regard and to then decide the comparability of this company in the light of the decisions rendered by the co-ordinate benches of this Tribunal in this regard.

20. (12) SIP Technologies Exports Ltd.
20.1 This company was selected as a comparable by the assessee but was rejected by the TPO on the ground of abnormal activity. The TPO in his order has recorded that this company has made an investment of Rs. 5 Crores in SIP Solutions, which is more than twice the total revenue and 76% of the share capital of the company and that this affects the working capital resulting in abnormal margin / losses. Before us, the assessee submitted that the company does not have abnormal business activity; that the investment in SIP Solutions pertains to prior years and there is nothing to establish that margins were impacted because of this activity.

20.2 We have heard both parties and carefully perused and considered the material on record. We find from the record that the TPO has dealt with this issue in a cursory manner. Mere investment in a business activity cannot be a reason for rejection of this company as a comparable. Every company is normally required to make investment in business activities and this factor alone cannot be a reason for rejection of a comparable; particularly if the investment pertains to the earlier years, as claimed by the assessee. The TPO is required to demonstrate as to how this particular investment has impacted the margin and why such an impact could not have been adjusted for comparability. In this view of the matter, we restore this issue back to the file of the TPO to consider the issue afresh in the light of the above observations. The TPO is directed to afford the assessee adequate opportunity of being heard before deciding the issue. It is ordered accordingly.

21. Foreign Exchange Gain / Loss (Ground of appeal : 14)
21.1 The assessee submits that the TPO while computing the margins, has treated foreign exchange gain/ loss arising out of the normal course of business as a non-operating item of income / expense respectively and excluded the same for computing the margins. The assessee contends that the foreign exchange gain / loss arising in the normal course of business should be considered for computing the operating margins of the assessee and of the comparables. The assessee has placed reliance on the following judicial decisions :-

(i)		Sap Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (Bang.)
(ii)		Four Soft Ltd. v. Dy. CIT [IT Appeal No. 1495 (Hyd.) of 2010, dated 9-9-2011]

21.2.1 We have heard both parties and given careful consideration to the material on record. We find that the TPO in his order has not given any reasoning for treating foreign exchange gain / loss as a non-operating item of income / expense. In the remand report submitted to the DRP, the TPO has merely stated that the exchange loss / gain could be on account of hedging / speculative activity owing to which it has been treated as non-operating in nature. In a rejoinder to the remand report, the assessee had submitted that the assessee receives remuneration from its AEs for rendering of services in foreign currency. The foreign exchange gain / loss relates entirely to the rendering of services and there is no speculative hedging activity.

21.2.2 Before us, it was reiterated that the foreign exchange gain should be considered as an operating income while computing the operating margins of the assessee and the comparable companies. We have carefully considered the submissions made. From the reasons given by the TPO in the remand report, it is clear that the TPO has considered the foreign exchange income as non-operating income based on assumptions and surmises. As pointed out by the assessee, there are several decisions of this and other Tribunals which hold that foreign exchange gain related to business activities are to be treated as operating income. In this view of the matter, we hold that foreign exchange gain is to be treated as operating income in the view of the facts in the case on hand and the margins are to be computed accordingly.

22. Working Capital Adjustment and Risk Adjustment (Ground of Appeal No. 13)

22.1 The assessee submits that working capital adjustment and risk adjustment should be granted to the assessee on the resultant set of comparables as arrived at by the Tribunal. It is seen that the TPO has granted working capital adjustment of 2.55% and therefore there is no dispute that the assessee is entitled for working capital adjustment. The TPO is directed to rework the working capital adjustment based on the resultant set of comparables arising out of the decisions on comparables in this order.

22.2 As regards risk adjustment, the TPO has not allowed any adjustment by observing that this has been considered and discussed in detail in the order for earlier years. We find that on similar facts, different co-ordinate benches of this Tribunal in the case of Intellinet Technologies India Ltd. v. ITO [2012] 22 taxmann.com 28/53 SOT 92 (Bang.)(URO) and Bearing Point Business Consulting (P.) Ltd. v. Dy. CIT [2013] 33 taxmann.com 92 (Bang. - Trib) have held that the TPO ought to have given risk adjustment to the margins of the comparables for bringing them on par with the assessee and remanded the issue back to the file of the TPO. Following the decisions in the aforementioned cases of the co-ordinate benches of this Tribunal (supra), we remand the issue of market risk adjustment to the file of the Assessing Officer/TPO for examining the issue in the light of the decisions cited.

23. In the ground at S. No. 17, the assessee denies itself liable to be charged of interest under section 234B and 234C of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter and we, therefore, uphold his action in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under sections 234B of the Act, if any, while giving effect to this order.

24. In the ground raised at S. No. 18, the assessee challenges the Assessing Officer's action in initiating penalty proceedings under section 271(1)(c) of the Act. No grievance is caused to the assessee by initiation of penalty under section 271(1)(c) of the Act and therefore this ground not being maintainable, is dismissed.

25. In the result, the assessee's appeal is partly allowed.