ITAT HYDERABAD BENCH 'B'

IT Appeal Nos. 1196 & 1197 (Hyd.) of 2010 & 2102 (Hyd.) of 2011
[ASSESSMENT YEARS 2005-06 AND 2007-08]

SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND B. RAMAKOTAIAH, ACCOUNTANT MEMBER

R. Vijayaraghavan for the Appellant.
M.H. Naik for the Respondent.

ORDER

Smt. P. Madhavi Devi, Judicial Member - ITA.No.1196/Hyd/2010 - A.Y. 2005-2006 and ITA.No.2102/Hyd/ 2011 - A.Y. 2007-2008 are filed by the assessee and ITA.No.1197/Hyd/2010 - A.Y. 2005-2006 is a cross appeal filed by the Revenue.

2. Brief facts of the case are that the assessee is into the business of development of software for its associated enterprise. For the A.Y. 2005-06, the assessee filed return of income showing NIL income after claiming deduction under section 10A of the I.T. Act, 1961. During the assessment proceedings under section 143(3) of I.T. Act, it was noticed by the Assessing Officer that the assessee has entered into international transactions with its associated enterprise value of which was shown at Rs. 12,19,73,249/-. In view of the same, the Assessing Officer made a reference to the TPO under section 92CA of the I.T. Act to determine the ALP. During the proceedings before the TPO under section 92CA of the I.T. Act, the assessee filed its transfer pricing study and the details of the comparables adopted by it and justified with reasons the adoption of these companies as comparables. The TPO observed that the assessee has taken 40 companies as comparables with an average profit margin @ 15.96% on cost. The assessee had been compensated by the Associated Enterprise at cost plus method and therefore, the margin earned by the assessee at 16.06% on operating cost was treated as at arms length by the assessee. The TPO also asked the assessee to substantiate the cost plus method adopted by the assessee and to communicate the objections, if any, for adopting TNMM as Most Appropriate Method (hereinafter referred to as "MAM") to determine the ALP. In response to the same, the assessee filed reply dated 25.8.2007 stating that they have no objection to adopt TNMM as MAM for arriving at the ALP and that they have prepared the documentation accordingly. The TPO observed that the assessee has not applied various filters for selection of the comparables as is necessary for determining the ALP under the TNMM. He, therefore, rejected the comparable companies adopted by the assessee and made his own search from the available databases. He adopted the following filters for the selection of comparables.

3. The TPO observed that the assessee has not objected to the adoption of the above filters for selection of the comparables. Thereafter, he proceeded to consider other filters not applied by the tax payer that is the assessee-herein and after applying all the relevant filters, the TPO selected 17 companies as comparables which are listed at page 75 of the Transfer Pricing Order. He also obtained information from the said comparable companies by issuing notices to the comparable companies under section 133(6) of the Income Tax Act requesting them to clarify certain issues. The details obtained under section 133(6) was communicated to the assessee vide office letter dated 30.04.2008. The companies from which information was gathered under section 133(6) were -

4. Out of the 17 companies proposed by the TPO, the assessee has accepted 10 companies as comparables which are as follows :

5. As far as additional comparables taken by the TPO, the assessee objected to the adoption of following companies only :-

6. After considering the assessee's contentions at length and rejecting them for the reason given in the Transfer Pricing Order, the TPO computed the arithmetic mean of operating profit to total cost at 26.59% and after giving the working capital adjustment of 0.81%, he arrived at the adjusted arithmetic mean of PLI at 25.78%. He, accordingly, made the adjustment of the short-fall under section 92CA at Rs. 1,44,00,953/-.

7. In consonance with the Order of the TPO, the Assessing Officer determined the taxable income of the assessee by making the suitable adjustments to the price received by the assessee for its services to the AE. Aggrieved by the additions made by the Assessing Officer, the assessee preferred an appeal before the CIT(A) who confirmed the Order of the Assessing Officer and the assessee is in second appeal before us. Though the assessee has raised as many as four grounds of appeal, its main objection is against the comparables adopted by the TPO to which the assessee has objected to before the TPO and also against the computation of relief under section 10A of the I.T. Act.

8. As far as the issue of computation of relief under section 10A is concerned, the learned Counsel appearing on behalf of the assessee, has submitted that the Assessing Officer has reduced the communication expenses of Rs. 10,60,618/- from the export turnover for computation of the deduction under section 10A of the I.T. Act. He submitted that the CIT(A), without appreciating the fact that the communication expenses were consisting of telephone charges, and internet charges which were incurred in normal course of business and not specifically for the purpose of delivery of software outside India, should have directed to be excluded from the export turnover for computing the deduction under section 10A of the Act. In the alternative, the learned Counsel for the assessee submitted that if these communication expenses are to be excluded from the export turnover, then the same should also be excluded from the total turnover for computing the deduction under section 10A of the I.T. Act and in support of this contention, he placed reliance upon the decision of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98/204 Taxman 321/17 taxmann.com 100.

9. Learned D.R. however, supported the Orders of the authorities below.

10. Having heard both the parties and having considered the material available on record, we find that the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) has held that if any expenditure is to be reduced from the export turnover, then the same is to be excluded from the total turnover also. For the purpose of computing the deduction under section 10A of the Income Tax Act, this decision of the Karnataka High Court has been followed by various Benches of this Tribunal in various other cases. Respectfully following the decision of the Karantaka High Court in the case of Tata Elxsi Ltd. (supra), we direct the Assessing Officer to exclude the communication expenses both from the export turnover as well as total turnover for the purpose of computing the deduction under section 10A of the I.T. Act. Thus, ground of appeal No.3 is allowed.

11. Ground Nos. 1 and 4 being general in nature, needs no adjudication.

12. Ground No.2 relates to the various comparable companies adopted by the TPO and as to why they should not be taken as comparables. At the time of hearing, the learned Counsel appearing on behalf of the assessee, has filed before us a chart giving details of the companies which have been considered by the TPO as comparable companies to the assessee and as to how the financial results of these companies should not be considered for the purpose of determination of the ALP. Therefore, we proceed to dispose of the assessee's appeal on the basis of this chart after hearing both the parties.

13. The assessee has mainly objected to the adoption of the following companies before us as comparables.

14. Exensys Software Solutions Limited: As regards this company, the learned Counsel appearing on behalf of the assessee submitted that the operating profit by operating cost of this company is 70.68%. He submitted that though the assessee has not objected to the adoption of this company as comparable before the TPO, it has come to its knowledge subsequently that there is an extraordinary event in the company which has effected the margins of the company for the relevant assessment year. He submitted that during the relevant previous year, the Exensys Software Limited was amalgamated with another company by name Holool India Limited and the operating margin of 70.68% is the combined result of the amalgamated company. Thus, according to him, the data collected by the TPO is not reliable and therefore, this company should be excluded from the list of comparables.

15. For this purpose, he has drawn our attention to pages 526 to 529 of the paper book filed along with the chart wherein while giving information to the TPO under section 133(6) of the I.T. Act, Exensys Software Limited has clearly mentioned that Holool India Limited and Exensys Software Limited got amalgamated w.e.f. 1.4.2004 and accordingly the financial statements as on 31.3.2004 had been combined and accounts for the financial year 2004-2005 had been maintained as one entity i.e., Exensys Software Solutions Limited. It is also mentioned in the said communication that by virtue of the merger, there is a gap in expenditure expected to incur and actual expenditure incurred, which may have resulted in high operating margin on cost. Thus, according to him, this company is to be excluded from the list of comparables.

16. The learned DR, on the other hand, has supported the Orders of the authorities below and submitted that the assessee had not objected to the adoption of this company viz., Exensys Software Solutions Limited before the TPO nor has raised any ground of appeal before the CIT(A) on the adoption of this company. He submitted that the assessee should therefore, be precluded from raising such objection at this stage before us.

17. Having heard both parties and having considered the material available on record, we find that there is no dispute that the assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i.e., Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Higher Forums that to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by the assessee are made for the first time before the Tribunal. The Tribunal being the final fact finding authority is bound to take note of the objections of the assessee. As the material relied upon by the learned Counsel for the assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, we deem it fit and proper to remand this issue to the file of the Assessing Officer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz., Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct the Assessing Officer/TPO to exclude this company from the list of comparables.

18. Infosys Technologies Limited: According to the learned Counsel for the assessee the operating margin of this company is 42.83% and is a giant company which is into diversified activities of software development. He submitted that Infosys Technologies Limited is not only a giant company but is also into development of niche products and therefore, cannot be taken as comparable to any other software company, particularly, a small company like the assessee. He relied upon the decisions of the Tribunal in the case of Patni Telecom Solutions (P.) Ltd. v. Asstt. CIT [IT Appeal No. 1846 (Hyd.) of 2012], Dy. CIT v. Deloitte Consulting India (P.) Ltd. [2011] 12 taxmann.com 500 (Hyd.), Ad-India Technologies (P.) Ltd. [IT Appeal No. 3856 (Delhi) of 2010] wherein Infosys Technologies Ltd. has been directed to be excluded from the list of comparables.

19. The learned D.R. however, supported the Orders of the authorities below.

20. We have heard both the parties. We find that Infosys Technologies Ltd., though, is into the similar business of the assessee as software development, cannot be considered as a comparable to any other companies which are also involved in similar activities. It is not only a giant company but is also engaged in development of various niche products. It cannot be compared to the assessee in any manner. Similar directions have been given by the Tribunal at Delhi and Hyderabad Benches in the cases cited (supra).

21. In the result, we direct the Assessing Officer/TPO to exclude this company from the list of comparables.

22. Tata Elxsi Limited: As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee.

23. The other companies which are objected to by the assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services (P.) Ltd. v. Dy. CIT [2012] 53 SOT 89 (URO)/22 taxmann.com 70 wherein these companies were directed to be excluded from the list of comparables.

24. The learned D.R. however, supported the Orders of the authorities below.

25. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO has exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs.

26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products.

27. As far as Flexitronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee-company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables.

28. In the result, assessee's appeal ITA.No.1196/Hyd/2010 is partly allowed for statistical purposes.

29. ITA.No.1197/Hyd/2010 - A.Y. 2005-2006: This is a Revenue's appeal against the Order of the CIT(A). In this appeal, the only grievance of the Revenue is against the Order of the CIT(A) directing the Assessing Officer/ TPO to exclude the communication expenses from both the export turnover as well as the total turnover. This issue is also covered by the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) and in the assessee's appeal in ITA.No.1196/Hyd/2010 we have already decided the issue in favour of the assessee and directed the Assessing Officer/TPO to exclude the communication expenses from both the export turnover as well as total turnover. In view of the same, we do not see any merit in the Revenue's appeal and accordingly we dismiss the same.

30. In the result, Revenue's appeal ITA.1197/Hyd/2010 is dismissed.
31. ITA.No.2102/Hyd/2011 - A.Y. 2007-2008: For the relevant A.Y. the only grievance of the assessee is against the selection of some comparable companies for determining the ALP. The facts are similar to the facts of the case for the A.Y. 2005-2006 which are narrated in the paragraphs above. The following companies are objected to by the assessee for selection as comparables :

32. As far as first two companies are concerned, these two companies were also adopted as comparables in the assessee's own case for the A.Y. 2005-2006 and for the A.Y. 2005-2006 we have already held that these companies are functionally different and the Assessing Officer/TPO could not have taken these companies as comparable companies without making the suitable adjustments for the differences. Respectfully following our own decision, even dated, these two companies are directed to be excluded from the list of comparables. As far as Infosys Technologies Limited and Wipro Limited are concerned, we find that both are giant companies and are into diversified activities and for the detailed reasons given by us in the assessee's own case for the A.Y. 2005-2006 even dated, we direct that these two companies are to be excluded from the list of comparables.

33. As far as Tata Elxsi Limited is concerned, the learned Counsel appearing on behalf of the assessee has relied upon the communication of Tata Elxsi Limited to the Transfer Pricing Officer in the case of another assessee to say that it cannot be taken as a comparable company to enter software development services companies. For the A.Y. 2005-2006 we have directed the Assessing Officer/TPO to consider the contents of the said communication and take decision in accordance with law. Similar direction is given for this assessment year 2007-2008 also.

34. As far as Mega-Soft is concerned, the learned Counsel for the assessee has drawn our attention to the fact that the segmental margin of this company's software development services is only 23.11%. Whereas, the Assessing Officer/TPO has taken the combined result of 60.23%. He submitted that the Tribunal at Bangalore in the case of Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540/29 taxmann.com 310 has directed the Assessing Officer/TPO to take only the segmental margin into consideration while computing the ALP of that company i.e., M/s. Trilogy E-Business Software India Private Limited. The learned Counsel for the assessee has sought similar direction in this case also. Having gone through the decision of the Tribunal at Bangalore Bench in the case of Trilogy E-Business Software India (P.) Ltd.'s case (supra), we direct the Assessing Officer/TPO to take only the segmental margin of this company for the relevant previous year into consideration for computing the ALP of the assessee.

35. As far as Kals Information System Limited and Lucid Software are concerned, learned Counsel for the assessee submitted that these companies are functionally different from the assessee and as far as Lucid Software is concerned, segmental data is also not available. Thus, according to him, these two companies are also to be excluded from the list of comparable companies. In support of his contention, the learned Counsel for the assessee relied upon the decision of the Bangalore Tribunal in the case Trilogy E-Business Software India (P.) Ltd. (supra) wherein at paras 46 and 47 of its order, the Tribunal has discussed the functional dissimilarity of the said companies with the assessee therein and has directed that the company should be excluded from the list of comparables. Similarly, the Tribunal at Bangalore in the case of HCL EAI Services Ltd. v. Dy. CIT [IT (TP) Appeal No. 1348 (Bang.) of 2011] at para 17 at pages 24 to 26 of its order has discussed at length the reasons for not considering the said company as comparable to software development services company. The relevant portion of the respective order is reproduced hereunder :

"(d) KALS Information Systems Ltd.

46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software 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 v. 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:

Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.

47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable".

"17. As far as Sl.No.14 of the list of comparable chosen by the TPO is concerned viz., Lucid Software Ltd., is concerned, this Tribunal in the case of CSR India Ltd. in ITA No.1119/Bang/2011, order dated 29.01.2013 for AY 07-08, had considered the comparable of this company with a software service provider like the assessee and has come to the conclusion that the same is not comparable, on the ground that this company was software developer. The following were the relevant observations of the Tribunal:-

(E) Lucid Software Limited
3.4.2. The above company has been rejected as comparable in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra). The submissions and the finding of the Hon'ble Mumbai Tribunal is reproduced below:-

3.4.3 The objections raised by the assessee for inclusion of Lucid Software Ltd. as a comparable is placed at pages 244 to 248 of the paper book filed by the assessee. We find identical objection has been raised against the inclusion of Lucid Software in case of Telcordia Technologies. Since the facts and the assessment year are identical, following the order of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra), we direct the Assessing Officer/TPO not to include Lucid Software Limited as a comparable."

36. We find that both M/s. HCL EAI Services Ltd. as well as M/s. Trilogy E-Business Software India Private Limited are into software development services to its parent companies. The assessee is also into similar type of activity. Therefore, the decision taken in M/s. Trilogy E-Business Software India Private Limited as well as M/s. HCL EAI Services Ltd. to exclude Lucid Software and Kals Information Systems Ltd. applies to the facts of the case before us also. Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude these two companies also from the list of comparables.

37. As far as Accel Transmatic Limited and Avani Syncom Technologies Limited are concerned, the learned Counsel for the assessee submitted that these companies are also to be excluded from the list of comparables on the basis of the decision of the Tribunal at Bangalore in the case of Trilogy E-Business Software India (P.) Ltd. (supra). We find that the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) at page 27 at para 39 and at page 34, para 48 has given details as to why these two comparable should be excluded from the list of comparables. We have also brought out the similarity of functions performed by the assessee with that of M/s. Trilogy E-Business Software India Pvt Ltd. The relevant portions of the decision of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) is reproduced hereunder.

"(b) Avani Cimcon Technologies Ltd

39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:-

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:-

(e) Accel Transmatic Ltd.
48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd. v. Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows:

4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin."

38. Respectfully following the decision of the Coordinate Bench of the Tribunal, we direct that these companies should be excluded from the list of comparables.

39. As far as Ishir Infotech Ltd. is concerned, the learned Counsel for the assessee submitted that this company fails both employee cost filter of being less than 25% as well as RPT Filter of more than 15%.

40. The learned Counsel for the assessee has also relied upon the decision of the Coordinate Bench of the Tribunal in the case of HCL EAI Services Ltd. (supra) wherein taking note of the assessee's contention, has directed the Assessing Officer/TPO to exclude the said company from the list of comparables on the basis of the RPTG Filter of 15%. The relevant portion of the Tribunal's order is at pages 21 at paras 15 to 16 of its order is reproduced hereunder:

"15. With regard to Sl.No.11 of the list of comparable chosen by the TPO viz., Ishir Infotech Ltd., the ld. counsel for the assessee brought to our notice that this company does not satisfy the employee cost filter adopted by the TPO. In this regard, it is seen that at page 120 of the TPO's order, the TPO has discussed the comparability of this company. One of the filters applied by the TPO was that if the employee cost of a comparable company is less than 25% of its revenue, then the same cannot be treated as a comparable. According to the TPO, the employee cost was more than 25% of the total revenue and therefore the same should be taken as a comparable with the assessee. The assessee's objection is that in applying the 25% employee cost filter, the TPO has taken the professional fees paid to external third parties as part of the employees cost. The assessee's submission is that payment of professional fees to external third parties for the performance of services is not a payment on its own behalf and who are not employees of the organization, ought not to have been taken into consideration while arriving at the 25% employee cost filter. The order of the TPO on this aspect is not very clear as to how he has got over the aforesaid objection of the assessee. The TPO seems to have relied on the reply given by the company to the notice issued u/s. 133(6) of the Act. It was further brought to our notice that the Bangalore Bench of the Tribunal in the case of CSR India Ltd. in ITA No.1119/Bang/2011, order dated 29.01.2013for AY 07-08, had considered the comparable of this company with a software service provider like the assessee and has come to the conclusion that the same is not comparable, on the ground that it does not satisfy the related party transaction filter. The following are the observations of the Tribunal:-

(iii) Related party transaction:
3.5 Ishir Infotech Limited: The assessee had objected to the inclusion of Ishir Infotech Limited as a comparable being related party transaction in excess of 15% of total sales/revenue. The TPO had set a limit of 25% on the related party transaction. According to the assessee, the recent order of the Tribunal in the case of 24/7 Customer Com Private Ltd. had held that if comparable company has related party transaction exceeded 15% of the total sales/revenue, the same should not be comparable.

3.5.1 The learned DR present was duly heard.
3.5.2 The Tribunal in the case of 24/7 Customer Com Private Ltd. had held that if the related party transaction exceeded 15% of the total sales/revenue, the same cannot be taken as a comparable. The relevant contention that was raised and the finding of the Tribunal read as follows:-

16. Respectfully the aforesaid decision of the Tribunal, comparable at Sl.No.11 of the list of comparable chosen by the TPO has to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal".

41. Respectfully following the said decision of the Coordinate Bench of the Tribunal, we direct that this company is also to be excluded from the list of comparables.

42. In addition to the above, the assessee has also raised a ground relating to the computation of deduction under section 10A of the Act. The grievance of the assessee is that 25% of the internet expenses of Rs. 5,73,573/- i.e., Rs. 1,42,893/- from export turnover. We find that this issue is already covered by the decision of the Karnataka High Court in the case of Tata Elxsi Ltd. (supra) and respectfully following the same, we direct the Assessing Officer/TPO to exclude the said expenses from both the export turnover as well as the total turnover for the purpose of computing deduction under section 10A of the Act. Accordingly, this appeal is partly allowed for statistical purposes.

43. In the result, ITA.No.2102/Hyd/2011 of the assessee is partly allowed for statistical purposes.