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

Smt. Suvibha Nolkha for the Appellant. 
Smt. Mythli Rani, CIT-DR for the Respondent.

ORDER

B. Ramakotaiah, Accountant Member - This an appeal by the assessee against the order of the Assessing Officer under S. 143(3) read with S. 92CA and 144C of the Act dated 27.10.2011. The company, M/s. Intelligroup Asia Pvt. Ltd has merged with NTT Data Global Delivery Services Limited, which has changed its name to NTT Data India Enterprises Application Services Pvt. Ltd. It has filed Form 36B revising the earlier form in the above name and has filed revised grounds also with additional grounds.

2. The Intelligroup Asia Pvt. Ltd., the erstwhile company is a subsidiary of Intelli Inc. USA and was set up to provide software development services in the areas of ERP, sales design implementation, maintenance and providing internet technology sales to its customers. It is required to customise software based on software design specifications, determined by Intelli group or other related associated enterprises. Assessee provides software development services to the group and is stated to have been compensated at cost plus 15% mark-up on such cost. It also provides software developments services to third parties. On a reference made by the DCIT, Circle 21, Hyderabad under S. 92CA, the TPO undertook the exercise of transfer pricing analysis, and has determined the transfer pricing adjustments in an order under S. 92CA(3) dated 29.10.2010. The TPO analysed the financial results vide para 2.3 and determined the Operating Profit to Cost ratio at 10.21% (excluding interest, loss on investment, foreign exchange loss as part of cost). The TPO determined international transactions on software development services at Rs.103.35 crores. The assessee has reported total operating revenue at Rs. 149.89 crores. In the transfer pricing study by the assessee, it has selected seventeen comparables with average profit margin of 10.86% of cost. Assessee determined the profit margin at 11.71% and treated the margin so arrived at as within the Arm's Length range. The TPO however, rejected the TP study on the reason that the assessee did not use comparable data of the year under consideration and has used earlier years' financials also. Further, he objected to certain filters used. He re-determined the filters and made fresh search and arrived at 26 comparables whose Arithmetic Mean PLI was arrived at 24.11%. After making negative working capital adjustment at (-)3.33%, the Arithmetic Mean PLI was determined at 28.47%. Considering the assessee's operating cost of transactions at Rs. 136.00 crores, the Arm's Length Price was determined at Rs. 174.73 crores and after reducing sales with Non-AEs, the shortfall was arrived at Rs. 24.83 crores and suggested for transfer pricing adjustment of the above amount.
3. Assessee objected before the Dispute Resolution Panel. After considering various contentions of the assessee, the Dispute Resolution Panel accepted only that two companies, viz. Celestial Labs Ltd. and M/s. Geometric Ltd. cannot be considered as comparables and accordingly directed the Assessing Officer to compute the ALP after excluding the above two companies. The final list of 24 companies taken as comparable by the Assessing Officer/TPO are as under—

Sl. No.	Company Name	OP to Total Cost %
1.	Datamatics Ltd.	1.38
2.	E-Zest Solutions Ltd.	36.12
3.	IGate Global Solutions Ltd.	7.49
4.	Lanco Global Systems Ltd.	15.75
5.	Media Soft Solutions Ltd.	3.66
6.	Mindtree Consulting Ltd. (Seg.)	16.90
7.	Persistent Systems Ltd.	24.52
8.	Quintegra Solutions Ltd.	12.56
9.	R.S. Software (India) Ltd.	13.47
10.	T. Systems International Ltd. (Seg.)	15.07
11.	SIP Technologies and Exports Ltd.	13.90
12.	Sasken Communication Tech Ltd. (Seg)	22.17
13.	Thirdware Solutions Ltd. (Seg)	25.12
14.	Accel Transmatic (Seg)	21.11
15.	Avani Cimcon Technologies Ltd.	52.59
16.	Flextronics Software Systems Ltd. (Seg)	25.31
17.	Helios & Matheson Information Tech Ltd.	36.63
18.	Infosys Technologies Ltd.	40.30
19.	Ishir Infotech Ltd.	30.12
20.	Kals Information Systems Ltd. (Seg)	30.55
21.	Lucid Software Ltd.	19.37
22.	Mega Soft Ltd.	60.23
23.	Tata Elxsi Ltd. (Seg.)	26.51
24.	Wipro Ltd. (Seg.)	33.66

4. Objecting to the above action of the Assessing Officer/Transfer Pricing Officer, consequent to the orders of the Dispute Resolution Panel, assessee has raised various grounds, including sub-grounds before us. Assessee has not pressed grounds No. 1, 2, part of ground No. 3 from (a) to (f), part of 3(g) and (h) to (k) and (m). Therefore, these grounds are treated as withdrawn and consequently, rejected. The surviving grounds, including an additional ground— being 3(n), are as under—

"1. ….
2. ….
3. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding/confirming the fresh bench marking analysis undertaken by the learned TPO, which is defective in nature due to following reasons and is liable to be quashed:
(g)

i.	The ld TPO/DRP erred in not undertaking an objective comparative analysis and inter-alia selecting the following companies as comparables to the Appellant for determination of ALP under TNMM
ii.	Accel Transmatic Ltd. (Seg)
ii.	Avani Cimcon Technologies Ltd.
iii.	Flextronics Software Systems Ltd. (Seg)
iv.	Helios and Matheson Information Technology Ltd.
v.	Infosys Technologies Ltd.
vi.	Ishir Infotech Ltd.
vii.	Kals Infosystems Ltd.
viii.	Lucid Software Ltd.
ix.	Megasoft Ltd.
x.	Tata Elxsi Ltd. (Seg)
xi.	Wipro Ltd. (Seg)

ii. ……
(l) The Ld. AO/TPO/DRP erred in considering bad debts written back, miscellaneous income and reversal of provision no longer required, as non-operating while computing the operating margin of the Appellant and determined the TP adjustment.

(n) On the facts and in the circumstances, the Ld. CIT(A) TPO/DRP erred in making/confirming negative working capital adjustment to the arithmetic mean of the comparable companies in determining the Arm's Length Price relating to International transactions of the appellant.

4. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding/confirming the action of the TPO, to consider the cost incurred for rendering services to third parties also, to ascertain the Arm's Length Price of the international transaction of the appellant under Transaction Net Margin Method.

5. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding/confirming the action of the TPO in

5.1	denying the benefit/reduction of 5 per cent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act.
5.2	denying adjustment relating to different functions and risk of the assessee vis-à-vis the comparable companies.

6. On the facts and circumstances of the case and in law, the learned Assessing Officer/Hon'ble DRP erred in not granting full Tax Deducted at Source (TDS) credit of Rs. 55,70,991 as claimed in the return of income and the TDS certificates produced before the learned AO, thus resulting in short credit of TDS amounting to Rs. 31,81,369 to the appellant.
….."
5. We have heard the learned counsel and the Learned Departmental Representative. Learned Departmental Representative also placed on record written objections on the contentions raised by the assessee and we also perused the paper-book placed on record running to 809 pages.

6. At the outset, it has been fairly admitted that the comparables objected to in the list from Sl. Nos. 14 to 24 were already considered by the coordinate bench of this Tribunal in the case ofUnited Online Software Development India (P.) Ltd. in ITA No.1658/Hyd/2011 vide its order dated 24.9.2015 for assessment year 2007-08. Learned counsel submitted that the assessee has raised the same objections with reference to the above comparables and requested for exclusion of the said companies taken as comparables. Relevant portion of the order of this Tribunal dated 24.9.2015 in the case of United Online Software Development India (P.) Ltd. (supra), is as under—

'16. We have heard the arguments of both the sides and also perused the relevant material on record, including the paper-books and detailed filed by Assessee. It has been brought to our notice by the learned counsel for Assessee, and not disputed by the Learned Departmental Representative, that in assessee's own case for the assessment year 2006-07, the issue relating to comparable nature of three of the companies named in the original ground, viz. Megasoft Ltd., Infosys Technologies Ltd. and Tata Elxsi Ltd. (Seg)., and two out of the four companies named in the additional ground, viz. Accel Transmatic (Seg) and Kalis Information Systems Ltd. (Seg.) has come up for consideration before the Tribunal in ITA No.1500/Hyd/2010, and this Tribunal.

17. However, we find that the issue relating to comparable nature of nine out of above eleven companies (companies in original grounds as well as additional grounds taken together), viz. other than Flextronics Software Systems Ltd. (Seg.) and Helios & Matheson Information Tech. Ltd. has come up for consideration before this Tribunal for assessment year 2007-08 itself, in the case of Sumtotal Systems India P. Ltd., Hyderabad in ITA No.1710/Hyd/2011, wherein the Tribunal vide its order dated 9.5.2014 has accepted the contentions for exclusion of these nine companies under consideration before it. Relevant portion of the said order of the Tribunal, being para 7 thereof, reads as under—

"7. Each of these comparables in dispute, challenged in ground no 7 was considered as under:
AVANI CIMCON TECHNOLOGIES LIMITED :

7.1. Assessee has basically sought exclusion of above company on two grounds, firstly, this company has revenue from both product and software services and segment-wise data is not available and secondly, it is contended that the company has shown super normal profit of 52.59% against average margin of other comparables. It is very much evident from the TP order that Assessee has been categorised as a software development service provider. Coordinate Bench of this Tribunal in the case of Virtusa (India) Pvt. Ltd. (ITA No. 1962/Hyd/2011 dated 30/08/2013) after following some other decisions of the Tribunal has held this company cannot be treated as comparable as this company is also into product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with Assessee. As the aforesaid decision of the Coordinate Bench pertained to the same assessment year i.e. A.Y. 2007-08, following the same, we hold that this company cannot be treated as comparable to Assessee. Other cases considered the same comparable and rejected are as under:

	(a)	M/s. Foursoft Limited (ITA. No. 1903/H/2011)
	(b)	M/s. Conexant System India P. Ltd. ITA. 1978/H2011
	(c)	Intoto Software India P. Ltd. ITA. 2102/H/2010
	(d)	Telcordia Technologies India P. Ltd. ITA. 7821/Mum/2011
	(e)	Triology E-Business Solutions ITA. No. 1054/Bang /2011
	(f)	Bearing Point Business ITA. No. 1124/Bang/2011
	(g)	LG Soft India Pvt. Ltd. ITA. No. 1121/Bang/2011
	(h)	Transwitch India P. Ltd. ITA. No. 948/Bang/2011
	(i)	Mercedes Benz Research & Development ITA. No. 1222/Bang/2011
	(j)	CSR India P. Ltd. ITA. No. 1119/Bang/2011
	(k)	First Advantage ITA. No. 1086/Bang/2012
	(l)	HCL EAI Services Ltd. ITA. No. 1348/Bang/2011

We therefore direct the Assessing Officer/TPO to exclude this while computing ALP.
INFOSYS TECHNOLOGIES LTD. :

7.2 Objecting to the aforesaid company being treated as comparable, learned AR submitted that the company cannot be considered to be comparable to a captive service provider like Assessee, not only because of the quantum of revenue earned by them but also on account of various other factors. It was submitted that the company command a premium in the pricing of their products and services due to the goodwill, reputation and brand value. It was submitted that due to scale of operation it not only enjoy economies of scale in the lower cost of infrastructure facilities and employees but also earning profit. It was submitted that the company has diversified activities including products, consultancy and solutions. Company own intangibles and assume considerable risk which results in earning higher profits. In support of such contention the ld. AR relied upon a number of decisions, copies of which are placed in the paper book.

7.2.1. The learned DR strongly contesting the contentions of Assessee submitted that so far as Infosys Technologies is concerned, Assessee itself has selected the said company in the TP documentation. Therefore, Assessee cannot again object to the TPO selecting the said company as comparable. He further submitted that only because the company has brand value and is big in size, it cannot be treated as uncomparable to Assessee.

7.2.2. In rejoinder, the ld. AR submitted that Assessee selected Infosys on the basis of three years data, whereas TPO has considered only current year data. The learned AR further submitted that if Assessee has mistakenly selected a comparable, it cannot be estopped from objecting to the selection of that comparable in proceedings before higher forum. In this context, the learned AR relied upon the Income-tax Appellate Tribunal Special Bench decision in case of Quark Systems, 4 ITR (Trib) 606.

7.2.3. We have considered the submissions of the parties and perused the materials on record. On considering the same, we are of the view that this company cannot be considered as comparable to Assessee due to various factors such as its size, turnover, brand value, scale of operation, diversified activities and owning of intangibles. As can be seen from the TP order, the turnovers of Infosys Technologies Limited during the year under consideration are Rs.13,149 crores as against Rs. 42 crores of Assessee. Though it is a fact that Assessee in the TP documentation, has selected Infosys Technologies Ltd. as comparable but that cannot prevent Assessee from objecting to the aforesaid company being selected as comparable, if there are valid reasons for doing so. In this context, the contention of the learned AR that Assessee has selected Infosys Limited on the basis of three years financial data, whereas the TPO considered only the current year data also needs to be appreciated. Therefore, considering the enormity of turnover of the company as well as other relevant factors, the aforesaid company cannot be treated as comparable to Assessee in any manner. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as stated below as well as that of the Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies Pvt. Ltd. [2013] 85 CCH 146.

	(a)	M/s. Foursoft Limited (ITA. No. 1903/H/2011)
	(b)	M/s. Conexant System India P. Ltd. ITA. No. 1978/H/2011
	(c)	M/s. Virtusa (I) P. Ltd. ITA. No. 1962/Hyd/2011
	(d)	Telcordia Technologies India P. Ltd. ITA. No. 7821/Mum/2011
	(e)	Triology E-Business Solutions ITA. No. 1054/Bang/2011
	(f)	Adaptec (India) P. Ltd. v. DCIT ITA. No. 1801/Hyd/2009
	(g)	Trinity Advanced Software Labs P. Ltd. v. ACIT ITA. No. 1129/Hyd/2005

We therefore direct the Assessing Officer/TPO to exclude this while computing ALP.

ISHIR INFOTECH LTD
7.3. So far as this company is concerned, Assessee has sought exclusion of the aforesaid company on the ground that this company fails employee cost filter as its employee cost was only 3.96%. In this context, the learned AR has relied upon the decision of co-ordinate Bench of this Tribunal in case of M/s Virtusa (India) Pvt. Ltd. (supra). On a perusal of the order passed in case of M/s Virtusa (India) Pvt. Ltd. (supra), we find that the co-ordinate bench has held that Ishir Infotech Limited cannot be treated as comparable as it does not qualify the employee cost filter as well as RPT filter. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as stated below :

	(a)	M/s. Foursoft Limited (ITA. No. 1903/H/2011)
	(b)	Intoto Software India P. Ltd. ITA. 2102/H/2010
	(c)	LG Soft India P. Ltd. ITA. 1121/Bang/2011
	(d)	Transwitch India P. Ltd. ITA. 948/Bang/2011
	(e)	Mercedes Benz Research & Development ITA. No. 1222/Bang/2011
	(f)	CSR India P. Ltd. ITA. No. 1119/Bang/2011
	(g)	First Advantage ITA. No. 1086/Bang/2012
	(h)	HCL EAI Services Ltd. ITA. No. 1348/Bang/2011.

Respectfully following the aforesaid decisions of the co-ordinate bench, we direct the Assessing Officer/TPO to exclude this company from the list of comparables.

LUCID SOFTWARE LIMITED :
7.4. The main objection of assessee with regard to the aforesaid company is that it earns revenue both from product development as well as software services for which segmental data is not available. In support of such contention, the learned AR has relied upon the decision of co-ordinate bench in the case M/s Virtusa (India) Pvt. Ltd. (supra). On perusal of the order passed in case of M/s Virtusa (India) Pvt. Ltd. (supra), it is seen that the co-ordinate bench has excluded the aforesaid company accepting assessee's contention that segmental data in respect of sale of products and software services are not available. Further following cases also considered the above company and excluded the same on same reason.

	(a)	M/s. Foursoft Limited (ITA. No. 1903/H/2011)
	(b)	Intoto Software India P. Ltd. ITA. 2102/H/2010
	(c)	Telcordia Technologies India P. Ltd. ITA. No. 7821/Mum/2011
	(d)	LG Soft India P. Ltd. ITA. 1121/Bang/2011
	(e)	Transwitch India P. Ltd. ITA. 948/Bang/2011
	(f)	Mercedes Benz Research & Development ITA. No. 1222/Bang/2011
	(g)	CSR India P. Ltd. ITA. No. 1119/Bang/2011
	(h)	First Advantage ITA. No. 1086/Bang/2012
	(i)	HCL EAI Services Ltd. ITA. No. 1348/Bang/2011.

Following the aforesaid decisions of the Coordinate Benches, we direct exclusion of the aforesaid company from list of comparables.

MEGASOFT LIMITED :
7.5. The main objection of Assessee with regard to the aforesaid company is that this is predominantly a product development company and margin from software development services is 23.11%. As can be seen, in case of M/s Virtusa (India) Pvt. Ltd. (supra), the Co-ordinate Bench of the Tribunal while considering Assessee's objection with regard to the aforesaid company had directed the Assessing Officer/TPO to take only segmental margin of this company for computing ALP. Similar view was also expressed in the following cases :

	(a)	M/s. Foursoft Limited (ITA. No. 1903/H/2011)
	(b)	M/s. Conexant System India P. Ltd. ITA. No. 1978/Hyd/2011
	(c)	Intoto Software India P. Ltd. ITA. 2102/H/2010
	(d)	Triology E-Business Solutions ITA. No. 1054/Bang/2011
	(e)	Telcordia Technologies India P. Ltd. ITA. No.7821/Mum/2011
	(f)	Bearing Point Business ITA. No. 1124/Bang/2011
	(g)	LG Soft India P. Ltd. ITA. 1121/Bang/2011
	(h)	Transwitch India P. Ltd. ITA. 948/Bang/2011
	(i)	Mercedes Benz Research & Development ITA. No. 1222/Bang/2011
	(j)	CSR India P. Ltd. ITA. No. 1119/Bang/2011
	(k)	First Advantage ITA. No. 1086/Bang/2012
	(l)	HCL EAI Services Ltd. ITA. No. 1348/Bang/2011.

Respectfully following the aforesaid orders of co-ordinate benches, we direct the Assessing Officer /TPO to consider only the segmental margin of this company for the relevant assessment year for computing ALP.

TATA ELXSI LIMITED :

7.6. Assessee has sought exclusion of the aforesaid company by placing reliance upon the information furnished by said company u/s 133(6) wherein the said company has admitted that it cannot be treated as comparable with any other software service provider due to complex nature of its business. However, while the TPO selected the aforesaid company by holding that the services provided are akin to software development services, the DRP, did not comment on the comparability of this company. The learned AR submitted that comparability of the aforesaid company was considered and analysed by different benches of the ITAT and the aforesaid company was rejected as comparable to the software services provider. For such contention, the learned AR relied upon the following decisions:

	(a)	Telcordia Technologies India P. Ltd. ITA. No. 7821/Mum/2011
	(b)	Triology E-Business Solutions, ITA No. 1054/Bang/2011.
	(c)	M/s. Foursoft Limited (ITA. No. 1903/H/2011)
	(d)	M/s. Virtusa (I) P. Ltd. ITA. No. 1962/Hyd/2011
	(e)	M/s. Conexant System India P. Ltd. ITA. No. 1978/Hyd/2011.

7.6.1. The learned DR, on the other hand, supported the orders of the AO/TPO and DRP in this regard and referred to the observations made by the TPO in his order.

7.6.2. We have heard the submissions of both the parties and perused the material on record. In case of Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011, the ITAT Mumbai Bench while considering the comparability of the aforesaid company with software services provider held as under:

"7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from Assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from 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 fit for comparability analysis for determining the arm's length price for Assessee, hence, should be excluded from the list of comparable parties."

Following the decision of the ITAT Mumbai Bench as aforesaid and also considering the fact that the company itself in the information provided in response to the notice issued u/s 133(6) of the Act has admitted that it cannot be considered as comparable with other assessees, we direct exclusion of the aforesaid company from the list of comparables while determining ALP.

WIPRO LIMITED :
7.7. While objecting to the aforesaid company being treated as comparable, the learned AR submitted that the TPO only on considering segmental details submitted by the said company for IT services, in response to notice issued u/s 133(6), has considered it as a comparable. It was submitted that the aforesaid company is a diversified company and discloses segmental information for IT services and products as one segment in its annual report. It was submitted that the TPO has not provided any other documents excepting segmental information obtained from TP report of Wipro, which is unaudited, manually corrected and unverified. It was submitted that Wipro is also considered to be a giant in its field assuming all the risks and cannot be compared to captive service provider like Assessee. To support his contentions with regard to non-comparability of the said company, he relied upon the following decisions :

	(a)	Telcordia Technologies India P. Ltd. ITA. No. 7821/Mum/2011
	(b)	Triniti Advances Software P. Ltd., ITA No. 1129/H/2005.
	(c)	M/s. Foursoft Limited (ITA. No. 1903/H/2011)
	(d)	M/s. Virtusa (I) P. Ltd. ITA. No. 1962/Hyd/2011
	(e)	M/s. Conexant System India P. Ltd. ITA. No. 1978/Hyd/2011.
	(f)	Adaptec (I) P. L.td. ITA. No. 1801/Hyd/2011.

7.7.1. The learned DR on the other hand supported the orders of the DRP as well as TPO so far as the selection of the aforesaid company as comparable while determining ALP.

7.7.2. We have heard the submissions of the parties and perused the material on record. The ITAT Mumbai Bench in case of Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011, while considering the objection of Assessee for treating the aforesaid company as comparable held as follows:

"7.5 This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with Assessee company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, we hold that Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO."

7.7.3. As can be seen from the facts and materials on record during the year under consideration, the segmental turnover of the Wipro Ltd. is 9616.09 crores. Therefore, considering the turnover, brand value as well as other dynamics of Wipro Ltd., it comes in the same category as Infosys and certainly cannot be compared with Assessee. Therefore, following our reasoning in case of Infosys Technologies Ltd. And other coordinate bench decisions, we hold that Wipro Ltd. cannot be treated as comparable with Assessee.

ACCEL TRANSMATIC LTD. :
7.8. With regard to this company, the complaint of 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 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:

"In regard to Accel Transmatics Ltd. Assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under.

(i)	Transmatic system - design, development and manufacture of multi-function kiosks Queue management system, ticket vending system.
(ii)	Ushus Technologies - offshore development centre for embedded software, network system, imaging technologies, outsourced product development.
(iii)	Accel IT Academy (the net stop for engineers)— training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO
(iv)	Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development."

7.8.1. On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with Assessee that the company was functionally different from 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. It directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. A similar view was taken in the following cases :

	(a)	M/s. Conexant System India P. Ltd. ITA. No. 1978/Hyd/2011.
	(b)	Intoto Software India P. Ltd. ITA. 2102/H/2010
	(c)	Bearing Point Business ITA. No. 1124/Bang/2011
	(d)	LG Soft India P. Ltd. ITA. 1121/Bang/2011
	(e)	Transwitch India P. Ltd. ITA. 948/Bang/2011
	(f)	Mercedes Benz Research & Development ITA. No. 1222/Bang/2011
	(g)	CSR India P. Ltd. ITA. No. 1119/Bang/2011
	(h)	HCL EAI Services Ltd. ITA. No. 1348/Bang/2011.

Respectfully following the decisions of the Coordinate Benches of the Tribunal, we direct that this company should be excluded from the list of comparables.

KALS INFORMATION SYSTEM LIMITED :

7.9. As far as Kals Information System Limited is concerned, learned Counsel for Assessee submitted that it is functionally different from Assessee. In support of his contention, the learned Counsel for Assessee relied upon the decision of the Bangalore Tribunal in the caseM/s. Triology E-Business Software India Private Limited (supra) wherein at paras 46 and 47 of its order, the Tribunal has discussed the functional dissimilarity with 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 M/s. HCL EAI Services Ltd. v. DCIT IT (TP) A. No. 1348/Bang/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 order is reproduced hereunder :
(d) KALS Information Systems Ltd.

46. As far as this company is concerned, the contention of 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 Rs.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. DCIT ITA No. 1386/PN/2010 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:

"16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. Assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by Assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of IT enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds."

Based on all the above, it was submitted on behalf of 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 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 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 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 Assessee that this company is not comparable".

7.9.1. We find that both M/s. HCL EAI Services Ltd. ITA. No. 1348/Bang/2011 as well as M/s. Triology E-Business Solutions ITA. No. 1054/Bang/2011 are into software development services to its parent companies. Assessee is also into similar type of activity. Therefore, the decision taken in M/s. Triology E-Business Software India Private Limited as well as M/s. HCL EAI Services Ltd. to exclude Kals Information Systems Ltd. applies to the facts of the case before us also. Similar view has been expressed by the Coordinate Bench of the Tribunal in the following cases :

	(a)	M/s. Conexant System India P. Ltd. ITA. No. 1978/Hyd/2011.
	(b)	Intoto Software India P. Ltd. ITA. 2102/H/2010
	(c)	Bearing Point Business ITA. No. 1124/Bang/2011
	(d)	LG Soft India P. Ltd. ITA. 1121/Bang/2011
	(e)	Transwitch India P. Ltd. ITA. 948/Bang/2011
	(f)	CSR India P. Ltd. ITA. No. 1119/Bang/2011
	(g)	First Advantage ITA. No. 1086/Bang/2012

Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude the company from the list of comparables.

18. Similarly, as contended by the learned counsel for Assessee comparable nature of Flextronics Software Systems Ltd. (Seg) and Helio & Matheson Information Tech Ltd., has been rejected by coordinate bench of the Tribunal in the case of M/s. Axsys Healthcare Ltd. vide order dated 28.5.2014 in ITA No. 2076/Hyd/2011 for the assessment year 2007-08, for the following reasons—

"14. After hearing rival contentions, we agree that the following comparables were excluded by the Coordinate Benches considering the similar facts and arguments raised before us:

3. High Turnover— functionally dissimilar:
6. FLEXITRONICS SOFTWARE LIMITED :

"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 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 Assessee-company to bring them on par with Assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude from the list of comparables."

14. HELIOS & MATHESON information Technology Ltd.— This comparable is objected on the reason of low employee cost of 1.36%. Thus it fails the employee cost filter. Therefore, not comparable. Assessee relied on the judgment of Mentor Graphics P. Ltd. v.DCIT 109 ITD 101 (Del.) with reference to this comparable.

15. After considering the contentions, we are of the opinion that these 14 comparables are required to be excluded by the TPO. Respectfully following the decisions of the Coordinate Benches of the Tribunal, we direct that these companies should be excluded from the list of comparables as assessee turnover is only 2.18 crores and employee cost is more. Many of the companies are also found to be not functionally similar. The various filters and reasons accepted in other cases do apply to Assessee as TPO selected same 26 comparables in all the cases relied on and decided earlier in various cases. "

19. Further, as per the chart furnished before us, similar view has been taken by the coordinate benches of the Tribunal in similar matters, wherein comparable nature of above eleven companies has come up for consideration, such as—

(a)	M/s. Axsys Healthcare Ltd. (ITA No. 2076/hyd/2011)
(b)	M/s.Virtusa (I) P. Ltd. (ITA No. 1962/Hyd/2011)
(c)	M/s. Contexant System India Pvt. Ltd. (ITA Nos. 1978/Hyd/2011)
(d)	Intoto Software India Pvt. Ltd. (ITA No.2102/Hyd/2010)
(e)	Triology E-Business Solutions (ITA No. 1054/Bang/2011)
(f)	Telcordia Technologies India Pvt. Ltd. (ITA No. 7821/Mum/2011)
(g)	LG Soft India Pvt. Ltd. (ITA No. 1121/Bang/2011)
(h)	Transwitch India Pvt. Ltd. (ITA No. 948/Bang/2011)
(i)	Mercedes Benz Research & Development (ITA No. 1222/Bang/2011)
(j)	CSR India Pvt. Ltd. (ITA No. 1119/Bang/2011)
(k)	First Advantage (ITA No. 1086/Bang/2012)
(l)	HCL EAI Services Ltd. (ITA No. 1348/Bang/2011)
(m)	Adaptee (India) Pvt. Ltd.(ITA No. 1801/Hyd/2011)

20. Respectfully following the consistent view taken by the Tribunal with regard to comparable nature of the above seven companies in similar matters and more particularly, the decision of the Tribunal in the case of Sumtotal Systems India Private Ltd. cited supra, including the decision rendered in assessee's own case for assessment year 2006-07, we allow ground No. 7 of Assessee along with additional ground and direct the Assessing Officer to exclude the above eleven companies from the scope of comparability analysis.'

6.1 Respectfully following the same, the Assessing Officer/Transfer Pricing Officer is directed to exclude the above companies from the list of comparable companies. Assessing Officer is directed to modify and re-determine the Arm's Length Price accordingly. Ground No. 3(g) is accordingly allowed.

7. The next ground to be considered is ground no. 3(l), which alleges erroneous adoption of operating margin and arithmetic mean of comparable companies by the learned Transfer Pricing Officer. It was submitted that the TPO did not calculate the PLI of the assessee properly and excluded certain costs from the operating cost. Thereby as against the assessee's margin at 11.72%, TPO determined the margin at 10.21%. Even though learned counsel relied on various case-law, it was fairly admitted that this issue becomes academic, if Ground No. 4 is considered favourably. Consequently, we direct the TPO to keep in mind the objections of the assessee, while working out the PLI of the assessee company in the re-assessment proceedings.

8. Next ground for consideration is ground No. 3(n), which is raised as an additional ground. After considering the objections of the Learned Departmental Representative, additional ground, being legal in nature, is admitted. It is submitted that the assessee does not have any interest liability nor has any borrowals and there is no inventory maintained and there is no working capital risk. Following the principles laid down by the coordinate bench in the case of Adaptec (India) (P.) Ltd. v. Asstt. CIT [2015] 57 taxmann.com 307 (Hyd. - Trib.), negative working capital adjustment should not have been made by the TPO. It was further submitted that in assessee's own case for the assessment year 2008-09, the Assessing Officer was directed to re-workout the working capital adjustment, vide para 14 of the order dated 2.1.2015.

9. We have considered the contentions. It is true that in the case of Adaptec (India) (P.) Ltd.(supra), it was decided as under

'10. Ground No. 8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arm's length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under :

"14. Ground No. 11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under :

The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as :

•	The company does not bear any working capital risk since it is been fully funded by its A.E. from its inception and has no working capital contingencies.
•	The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement."
	We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. Ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under :

"7.7.4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to this situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made."

In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made."

11. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment.'

On principle, we agree with the assessee's contention that Transfer Pricing Officer should not have made negative working capital adjustment. However, for assessment year 2008-09 in assessee's own case, the coordinate bench of this Tribunal has given the following directions to the Assessing Officer—

"14. It was the objection of assessee that TPO has arrived at negative working capital adjustment wherein assessee does not have any risk and is a captive services provider. Therefore, following the decision of Coordinate Bench in the case of Cordys Software India P. Ltd., in ITA. No. 1972/H/2011 dated 15.03.2013 for A.Y. 2007-08, assessee requests for positive working capital adjustments. As far as the working capital adjustment is concerned, these are academic in nature and require to be analysed on the basis of assessee's work profile and comparable companies working results. No clear cut directions can be given in this as it requires examination of various documents. In fact, DRP itself has directed the TPO to re-workout the working capital adjustment after excluding certain comparable companies. We also directed the TPO to exclude certain comparables above. Consequently we direct the A.O. / TPO to re-workout the working capital adjustment after giving due opportunity to assessee, keeping in mind the principles laid down on this issue.

14.1. With reference to objection of assessee that it is a captive service provider fully funded by A.E. Assessee also undertakes works for third parties. It was one of the objection that internal TNMM is available as assessee undertakes with third parties also. This aspect need to be kept in mind by A.O. while considering the working capital risk in assessee's functional analysis. With these directions, the ground is restored to the file of TPO/A.O. to do accordingly in the consequential order."

In view of the above, Transfer Pricing Officer is directed to keep in mind the above directions/findings and work out the working capital adjustment, if any, required to be done, after giving due opportunity to the assessee, while making comparability analysis consequent to this order. This ground is accordingly considered as allowed.

10. Ground No. 4 pertains to the action of the Transfer Pricing Officer in considering the costs incurred for rendering services to third parties also while arriving at the Arm's Length Price of the international transactions of the assessee under TNMM. It was submitted that even though assessee has submitted segmental profits, the Transfer Pricing Officer has considered the total cost incurred by the assessee and enhanced the Arm's Length Price determined. When the transactions pertained to AE, costs pertaining to AE only should have been considered by him. In the guise of reducing the sales after revising the value of AE transactions, the TPO in fact made adjustment on the total cost on the services rendered to non-AEs as well. Learned counsel submitted that this issue was decided in favour of the assessee in assessee's own case for the assessment year 2008-09, vide paras 15 and 16 of its order dated 2nd January, 2015, cited supra, as under—

'15. A.O. while making the T.P. adjustment has considered the entire turnover including the non-A.E. transactions. Assessee objected before DRP and DRP considered vide para 57 as under :

57. The assessee submitted that the TPO erred in considering entire cost base of the company without differentiating between cost incurred in A.Es transactions and non-A.E. transactions and ignoring the A.E. and non-A.E. segmental results submitted by the assessee in this regard for the purpose of making transfer pricing adjustment. The assessee also informed that this contention has been upheld by Hon'ble DRP in the case of the assessee for A.Y. 2006-07. Even for the A.Y. 2005-06, in respect of the assessee itself, the TPO himself had restricted the transfer pricing adjustment to the operating cost base pertaining to A.E. transactions only. The panel agrees with the assessee and direct that the reimbursement of Rs.12,56,96,824/- be not taken for ALP calculation."

16. Ld. Counsel submitted that DRP got its findings mixed-up with reference to analysis of non-A.E. transaction to that of reimbursements. While direction of reimbursement is correct, the direction with reference to adjustment of non-A.E. transactions has not been given. Considering the observations of DRP and also various case law on the issue relied upon by assessee in M/s. Saven Technologies Ltd., v. ACIT ITA. No. 1456/Hyd/2010, we direct the A.O. to exclude the T.P. adjustment on the non-A.E. transactions and restrict the adjustment only to the A.E. transactions, in case ALP determined after comparability analysis require any adjustment under the provisions of the Act. With these directions, ground is considered as allowed.'

11. Considering the order of the Transfer Pricing Officer and the objections of the assessee, we are of the opinion that the entire cost was taken by the TPO for making adjustment, thereby invoking the TP proceedings on non-AE transactions as well. Therefore, we direct the Assessing Officer/Transfer Pricing Officer to exclude the TP adjustment on the non-AE transactions and re-workout the costs pertaining to the AE transactions and restrict the adjustment if any, only to the AE transactions. With these directions, this ground is considered as allowed.

12. Ground No. 5 pertains to the application of provisos to S. 92C(2) of the Act. This does not require any direction by us, as the provisions are very clear. The TPO is directed to keep it in mind while making the TP adjustment if any, consequent to this order.

13. Ground No. 6 pertains to non-granting full TDS credit as claimed by the assessee in the return of income, resulting in short deduction of TDS amounting to Rs. 31,81,369. It was submitted that the Dispute Resolution Panel directed the Assessing Officer to examine and give full credit or take suitable action. It was submitted that the Assessing Officer did not give full credit. The learned counsel only wanted a direction to be given to the Assessing Officer for giving credit. After considering the submissions of the learned counsel and the direction given by the Dispute Resolution Panel, we are of the opinion that the Assessing Officer did not follow the directions of the Dispute Resolution Panel while giving credit, as claimed by the assessee at Rs. 55,70,991. We therefore, reiterate the direction given by the Dispute Resolution Panel to examine the issue and give credit of TDS to the assessee.

14. Assessee should be given due opportunity while passing the consequential order and the objections, if any raised, should be dealt with appropriately.

15. With the above observations, appeal of the assessee is partly allowed for statistical purposes.