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« From the Courts »
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Toluna India Pvt. Ltd. 1st Floor, Unitech Trade Centre, Sushant Lok Phase-I, Gurgaon Vs. ACIT, Circle 12(1), New Delhi.
August, 27th 2014
         IN THE INCOME TAX APPELLATE TRIBUNAL
              DELHI BENCHES : I : NEW DELHI

  BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K., JM

                        ITA No.5645/Del/2011
                                        2007-08
                      Assessment Year : 2007-

Toluna India Pvt. Ltd.                 Vs.   ACIT,
(formerly known as Greenfield                Circle 12(1),
Online Pvt. Ltd.),                           New Delhi.
1st Floor, Unitech Trade Centre,
Sushant Lok Phase-I,
Gurgaon

PAN : AACCG0003G
  (Appellant)                                     (Respondent)


Assessee By      :    Shri Ashwani Taneja C.A. & Shri
                      Rohit Tiwari, CA

Department By    :    Shri Yogesh K. Verma, CIT, DR


                               ORDER

PER R. S. SYAL, AM:


     This appeal by the assessee is directed against the order

passed by the Assessing Officer on 24.10.2011 u/s 143(3) read

with section 144C of the Income-tax Act, 1961 (hereinafter also

called `the Act') in relation to the assessment year 2007-08.
                                                          ITA No.5645/Del/2011


2.    The assessee is aggrieved only against the inclusion of

certain companies in the list of comparables, which, in his

opinion, are functionally incomparable and also because of

differences in the assets employed and risks assumed.





3.    Briefly stated, the facts of the case are that the assessee

was incorporated in India in the year 2003 as a wholly owned

subsidiary of Greenfield Online Inc., USA (Greenfield US), the

ultimate parent entity of the Greenfield Group. The assessee is in

the business of software development and providing related

services    to   the   Greenfield   Group.      Certain     international

transactions were reported in the requisite Form. The assessee is

compensated on a time cost or fixed price basis for the projects

assigned.    Greenfield US is providing end to end information

technology services which include the provision of consulting and

systems integration services to managing IT and business

functions on behalf of its customers.        The dispute raised in the

present appeal is in relation to the international transactions of

receipt of revenue amounting to ` 17,81,69,412/- from Greenfield

US,   stated to be towards the provision of contract IT services.

The assessee benchmarked its international transactions by using
                                    2
                                                       ITA No.5645/Del/2011


Transactional Net Margin Method (TNMM) with the profit level

indicator (PLI) of Operating profit/Operating cost. The assessee

was compensated by its AE at a mark-up of 15% on costs incurred

by it. The assessee claimed that it did not own any intangibles,

conducted no research and development activities and, hence,

did not carry out any risk related activities. Certain comparables

were chosen by the assessee with their financial results for the

period ending between 1.4.2004 to 15.02.2007. On the basis of

certain filters adopted by the assessee, it was claimed that its

international transactions were at arm's length price (ALP). The

Transfer   Pricing   Officer   (TPO)   considered   each   and     every

comparable adopted by the assessee and finally came to the

conclusion that out of 13 comparables chosen by the assessee,

only two viz., SIP Technologies and Exports Ltd. and Bodh Tree

Consulting Ltd., were of suitable comparison.          The TPO also

rejected the assessee's adoption of multiple year data. He opined

that only the data for the relevant financial year, being 1.4.2006

to 31.3.2007, was required to be considered. A fresh search was

undertaken by the TPO. After due notice to the assessee on all

such chosen comparable companies and seeking comments of

                                   3
                                                   ITA No.5645/Del/2011


the assessee on their inclusion, the TPO shortlisted the following

26 companies as comparable:-


1.   Accel Transmatic Limited (Software services segment)

2.   Avani Cimcon Technologies Limited

3.   Celestial Labs Limited

4.   Datamatics Limited

5.   E-Zest Solutions Limited

6.   Flextronics Software Systems Limited (Products and Services
segment)

7.   Geometric Limited (Segmental)

8.   Helios & Matheson Information Technology Limited

9.   IGate Global Solutions Limited

10. Infosys Technologies Limited

11. Ishir Infotech Limited

12. KALS Information Systems Limited (Segmental)

13. LGS Global Limited (Lanco Global Solutions Limited)

14. Lucid Software Limited

15. Mediasoft Solutions Limited

16. Megasoft Limited (Consulting/Blue Alley Division)

                                  4
                                                   ITA No.5645/Del/2011


17. Mindtree Limited

18. Persistent Systems Limited

19. Quintegra Solutions Limited

20. R S Software (India) Limited

21. R Systems International Ltd. (Segmental)

22. Sasken Communication Technologies Limited (Segmental)

23. SIP Technologies & Exports Limited

24. Tata Elxsi Ltd. (Software development and services segment)

25. Thirdware Solutions Limited (Segmental)

26. Wipro Limited (IT Services segment).


4.   Arithmetic mean of OP/OC of such comparable companies

was computed at 25%. A negative working capital adjustment at

(-) 0.13% was worked out to compute adjusted arithmetical mean

of comparables at 25.13%.        This led to the transfer pricing

adjustment of ` 1,55,78,623/-. The assessee objected to the draft

order passed by the AO proposing addition on account of such

transfer pricing adjustment before the Dispute Resolution Panel

(DRP), but without success.    The Assessing Officer made the

addition on account of transfer pricing adjustment to the tune of

                                 5
                                                     ITA No.5645/Del/2011


Rs.1.55 crore vide the impugned order, against which the

assessee has come up in appeal before us.


5.   We have heard the rival submissions and perused the

relevant material on record. As the assessee has objected to the

inclusion of companies chosen by the TPO as comparable largely

on functional analysis, it becomes sine qua non first to analyze

the functional profile of the assessee with a view to determine the

functionality of the assessee so as to decide whether the

companies chosen by the TPO are comparable or not.


6.    It can be seen from page 2 of the TPO's order, wherein the

business profile of the assessee has been discussed, that the

assessee rendered software development and related services to

Greenfield Group. For the sake of completeness and to precisely

ascertain the assessee's correct functional profile, we refer to the

copy of the assessee's Transfer pricing study report which has

been placed at pages 1-48 of the paper book. Greenfield Group is

a leading provider of internet service solutions. Para 1.2.4 of the

TP study report presents that Greenfield US owns virtually all the

valuable intellectual property rights and other commercial or


                                 6
                                                     ITA No.5645/Del/2011


marketing intangibles and is involved in complex web based

operations.   Greenfield US bears all significant business and

entrepreneurial   risks   of   the   product    acceptability      and

performance in the market and Greenfield India does not own any

interest in any of these intangibles. Para 4.2.1 of the TP study

report states that Greenfield US is a leading online market

research service company. It provides consumers an opportunity

to participate in surveys and give their opinion about various

products and services offered by companies. It serves the data

collection and infrastructure needs of market research and

advertisement companies. It offers service solutions exclusively

using internet based methods which are customized to its clients'

needs. Summary of functions performed by the Greenfield US is

given in para 4.2.6 of the TP study report, which is as under:-


     "- Marketing and sales to build the Greenfield brand and
     reach the top end market Research companies;
  - Maintaining a large, varied panel group that is a true
    representative sample of the society;
  - Continuous expansion of the panel group through panel
    recruitment;




                                 7
                                                       ITA No.5645/Del/2011


     - Maintaining a network of affiliates to enable effective
       panel recruitment;
     - Maintaining a strong set up of servers to host the
       surveys."

7.     The assessee serves Greenfield US through its following

functional divisions, the details of which are available in paras

4.2.8 to 4.2.16 of the TP study report. Relevant parts of such

paras are as under :-


       "(a) SURVEY PROGRAMMING ­ Survey Programming is
       the first step in delivery process. All the Questionnaires
       provided by the client in word format are converted into
       WEB FORMS in this process. Greenfield India programs
       the surveys in Hyper Text Markup Language (HTML). The
       questionnaires involve data validation, quota checking,
       quote stops, etc. as part of coding. Usually templates
       are used to start with. Different templates are for
       different types of surveys or for specific clients. Use of
       templates eases the process of creating the survey........
       (b) SAMPLING ­ Once the survey is programmed and
       cleared by the client as good to launch, sampling team
       takes over. They launch the survey on the website.
       Then identify the right group of panelists based on
       criteria given by the client. An e-mail invitation is sent
       to the panelists, giving them the unique web link to the
       survey. The e-mail invitation also talks of the payout
       that will be given for taking part in this survey. Once the
       survey is live, the sampling team monitors the progress
       of completes received for each survey. They also send
       reminders or new invites based on the results being
       achieved from the hosting of survey. Once the required
       number of completes are received, the survey is closed
       and handed over for Data Processing.......

                                   8
                                                 ITA No.5645/Del/2011


(c) DATA PROCESSING ­ Data processing is the next
step. In this step, the teams prepare the data for
presentation to the client. The data is cleaned and re-
formatted so that client can analyze it. The output
format depends on the requirements specified by the
client. To verify that the data is accurate, a sanity check
is done by generating various kinds of reports. The
reports are called Marginals and Frequencies........
(d) SOFTWARE DEVELOPMENT ­ This group within
Greenfield India focuses on development/enhancement
of software projects that relate to business automation,
increase in efficiency and making the business easier for
specific functions performed by Greenfield India. They
also contribute to web-site re-design, enhancement,
image-makeovers, etc. The software are web based
developments using Microsoft Technologies.....Since
Greenfield US is an Online Data collection company, all
the data is collected online on MS-SQL server databases.
The DB's (Database Programmer) help in maintaining
the database and running any reporting based on the
data.'
(e) PROJECT MANAGEMENT SUPPORT ­ Currently,
Greenfield India employs 13 project managers which
provide support to a large team of project managers at
Greenfield US in their client servicing functions, including
managing the projects when the main project manager
is away on leave, etc.
(f) HELP DESK - While panelists are taking part in
the survey, they have some questions that need to be
answered. Helpdesk team is dedicated to supporting
panelists and their queries.
(g) QUALITY - Greenfield puts a lot of importance on
Quality of deliverables.     We follow Six Sigma
methodology    to  eliminate  all   process   related
problems....."



                             9
                                                      ITA No.5645/Del/2011


8.   An overview of the above functional divisions of the assessee

indicates that the first three and sixth divisions deal with online

services rendered to its AE; the fourth division is for software

development projects contributing towards website redesign

enhancement and image makeovers, etc.; the fifth division is for

providing support to the projects managers and Greenfield US in

their client serving functions including managing the projects; and

the last division is for quality maintenance. Here, it is pertinent to

mention that all the above divisions of the assessee serve only its

AE on the cost plus basis. After analyzing the        work done by

various divisions, there remains no doubt about the nature of

work done by the assessee, which is obviously not only of

software service provider but also that of a software developer

(fourth division above), though        IP rights in such developed

software do not vest in the assessee but with its AE. The ld. AR

vehemently argued that the assessee is only a software service

provider and not a software developer and this fact has also been

acknowledged by the TPO. He argued that a software product

company cannot be compared with a pure software service

provider. A software product company has to assume all the

                                  10
                                                    ITA No.5645/Del/2011


costs/risks   from   the   conceptual   stage,   passing     through

development stage culminating into the successful completion

stage of the software product finally developed. The intellectual

property rights of such ultimate product ordinarily vest in the

software product company. The software service provider simply

plays some role assigned to him in the entire process, who does

not acquire any intellectual property rights of the work done by

him.


9.     We do not agree with this view canvassed by the ld. AR in

view of the discussion made above about the functional divisions

of the assessee, which makes it vivid that the assessee is both a

software service provider and also a software developer. The TPO

has nowhere acknowledged in his order, as argued by the ld. AR,

that the assessee is only a software service provider.          While

discussing the Business Profile of the company in para 2.2 of his

order, the TPO has mentioned in no uncertain terms that the

assessee : "is in the business of providing software development

and related services to Greenfield Group'.        As regards the

submission about difference between a software service provider

and a software product company, we agree, in principle, that a
                                11
                                                       ITA No.5645/Del/2011


software product company cannot be compared with a simple

software service provider. It has been noticed supra that the

assessee is not only a software service provider but also a

software developer. To contend that all the software product

companies are per se incomparable to the assessee, is not fully

correct. Before reaching any decision as to comparability or

otherwise of a software product company with the assessee, it is

paramount to see the nature of software product of that company

and its user.       If it is such a software product whose license is

given to outsiders for commercial use and income is earned by

the company from its commercial exploitation, then it would

mean that such a product must have been developed after

intensive research and development and the owner of such a

product will be holding its I.P. rights also. Such a software product

company cannot be compared with the assessee company, which

is also in to software development, but the software products

produced by it are not meant for commercial use to others and

neither the assessee is holding any I.P. rights of such products.

But   where     a    company is    engaged   into   software    product

development on contract basis, whether for its AEs or outsiders,

                                    12
                                                   ITA No.5645/Del/2011


without having any intellectual property rights in the products,

then such a company cannot be excluded from the list of the

assessee's comparables. At this stage, it is pertinent to mention

that the assessee is doing both - providing software service and

also software development - for its AEs at cost plus 15% markup.

On a specific query, the ld. AR candidly accepted that there is no

bifurcation available of the assessee's revenues from these two

areas. Since income      from providing software services and

software development is in a common pool and the PLI of OP/OC

in both of them is 15%, we hold that     the companies engaged

either in software development or providing software service or

doing both, are functionally comparable to the assessee. In this

overall segment, only the companies engaged as non-contract

software developers, having intellectual property rights over the

products developed by them, would be functionally different.


10. Having seen the functional profile of the assessee company

and formed the basis for the testing the functional comparability

of the companies chosen by the TPO,    we would like to deal with

two contentions raised by the ld. AR, which are germane to all or

most of the companies chosen by the TPO as comparable.
                                13
                                                      ITA No.5645/Del/2011


11. First point argued by the ld. AR was that the TPO in selecting

several companies as comparables, got information directly from

such companies u/s 133(6), which was not made available to the

assessee. On that score, it was contended that such companies

be declared as not comparable. This argument was countered by

the ld. DR by putting forth that each and every document

collected by the TPO from such companies was duly made

available to the assessee.


12.   We do not find any merit in this contention raised on behalf

of the assessee. It can be seen from the order of the TPO that

before including any company in the list of comparables, he gave

a show cause notice to the assessee proposing it as comparable

vide his office letters,   inter alia, the one dated 26.8.2010 and

also forwarded soft copies of the data so collected. It was then,

that he called upon the assessee to explain its stand. The

assessee made detailed submissions before the TPO against the

comparability   of   such    companies   vide   its   letters     dated

3/14.9.2010 running into more than 100 pages, copies of which

are available in the paper book. Through these letters, the

assessee objected to treating such companies as comparable
                                  14
                                                    ITA No.5645/Del/2011


giving specific reasons. It is self evident that the assessee could

try to distinguish such companies only on the perusal of the data

of such companies supplied by the TPO. All the objections taken

by the assessee have also been incorporated in the order of the

TPO. We fail to understand as to how the ld. AR can raise such a

plea in the circumstances as are presently obtaining in this case,

that he was not confronted with the material used against him.

When the ld. AR pressed such objection beyond a point, the

Bench directed him to place on record the copies of the

notices/letters written by the TPO and also other material supplied

including soft copies, to demonstrate that which material was not

supplied to it. There was no compliance from the side of the

assessee. In view of the above discussion, it is manifest that such

objection has no substance and the same deserves to be and is

hereby repelled.


13.    Second point argued by the ld. AR common to many

companies in the list of comparables was that certain Benches of

the Tribunal have held some of such companies to be not

comparable. In that view of the matter, it was argued that those



                                15
                                                            ITA No.5645/Del/2011


companies be automatically declared as not comparable and,

hence, excluded from the list of comparables drawn by the TPO.


14.    We again express our reservations in accepting this too

broad proposition.        It is axiomatic that if company `A' is

functionally different from company `B', then, such company

cannot be considered as comparable. Two companies can be

considered as comparable when both are discharging the overall

similar functions, though there may be some minor differences in

such   functions,   not    marring        the   otherwise   comparability.

Notwithstanding the functional similarity, many a times a

company ceases to be comparable because of the failure of

certain filters. To cite an example, if company `A', though

functionally similar to company `B', but has related party

transactions (RPT) breaching a particular level, then, such

company cannot be considered as comparable to company `A' in

the year in which the RPT breach such level. If, however, in the

subsequent year, the related party transactions fall below that

barrier, then such company would again become comparable. To

put it simply, if company `A' has been held to be incomparable

vis-a-vis company `B', then it is not essential that company `A'
                                     16
                                                      ITA No.5645/Del/2011


would be incomparable to company `C' also. What is relevant to

consider is, firstly, the functional profile of company `A' vis-a-vis

company `C'. If both are functionally similar, then notwithstanding

the fact that company `A' was held to be incomparable to

company `B', it would still be comparable to company `C'. Despite

the fact that company `A' is functionally similar to company `B', it

may still have been declared as incomparable to company `B'

because of failing some filter. If company `A' passes the same

filter vis-a-vis company `C', then company `A' will find its place in

the list of comparables of company `C', despite the fact that it

was held to be incomparable to company `B'.         The crux of the

matter is that the mere fact that company `A' has been held to be

not comparable in a judicial order passed in the case of company

`B', it cannot be said that company       `A'   would automatically

cease to be comparable to all the cases to follow.           Not only

company `A' held to be incomparable to          company `B' can be

comparable to company `C', but company `X' held to be

comparable to company `Y' can also be incomparable to company

`Z', depending upon the functional profile and the applicability or

otherwise of the related filters. There can be no hard and fast rule

                                 17
                                                   ITA No.5645/Del/2011


that if a particular company has been held to be not comparable

in the case of another company, then such former company would

also cease to be comparable to the assessee company also. The

comparability of each company needs to be ascertained only after

matching the functional profile and the applicable filters of the

other company.    Ergo,   this contention raised on behalf of the

assessee cannot be accepted.


15.   With the above parameters and the factual matrix, we will

distinctly examine the companies chosen by the TPO to ascertain

if they are really comparable.


Accel Transmatic Limited (Software Services segment):


16.1. The TPO noticed that this company was finding place in the

accept/reject matrix of the tax payer, but was rejected in the TP

documents by stating that it failed the filter of Advertising,

marketing and distribution expenses to sales at less than 3%. As

the data of the Software services segment of this company was

available, the TPO     proposed to include    it in   the list of

comparables.    The assessee objected to the inclusion of this

company on two issues, namely, the related party transactions

                                 18
                                                     ITA No.5645/Del/2011


were more than 10% and the advertisement expenses were more

than 3% of sales. After rejecting such objections, the TPO included

the software service segment of this company in the list of

comparables. The assessee's objections before the DRP also met

with failure before the DRP.


16.2.   After considering the rival submissions and perusing the

relevant material on record, we find that the assessee itself

considered this company as functionally comparable by including

it in the accept/reject matrix, but, rejected it on the ground that

advertisement expenses were more than 3%. It is important to

mention that the TPO has taken the figures of this company's

Software services segment alone, which is admittedly akin to that

of the assessee and that the Advertisement, marketing and

distribution spend in this segment is less than 3%, being the filter

applied by the assessee.


16.3.    In so far as the other objection of the percentage of

related party transactions is concerned, the ld. AR relied on two

tribunal orders in which filter of 15% RPT has been accepted. On

the contrary, we find the predominant view of the Tribunal across





                                 19
                                                     ITA No.5645/Del/2011


the country in several cases including Actis Advisors Pvt. Ltd. Vs.

DCIT [(2012) 20 ITR (Trib.) 138 (Del)], Stream International Pvt.

Ltd. Vs. ADIT (IT) [(2013) 141 ITD 492 (Mum) [authored by the AM

of this order] and Agilent Technologies International Pvt. Ltd. Vs.

ACIT [(2013) 36 CCH 187 (Del) (Trib.)], is that a company having

more than 25% of related party transactions is considered as

controlled. In other words, if the related party transactions in a

company are less than 25%, then, it cannot be considered as

controlled and hence qualifies to be comparable, if it is otherwise

so.


16.4. Since both the objections taken by the assessee against the

inclusion of this company are not sustainable, we uphold the

inclusion of the Software service segment of Accel Transmatic

Limited in the list of comparables. The assessee fails.


Avani Cimcon Technologies Limited:


17.1. The TPO found this company to be engaged in software

development.    Notice u/s 133(6) was issued to the company to

get complete information.    According to the TPO, this company

qualified all the filters. The assessee argued before the TPO that

                                 20
                                                       ITA No.5645/Del/2011


this company was into software products and the segmental

results were not available. The TPO rejected such contention by

relying on the specific information collected from the company u/s

133(6) which divulged that this company was a purely software

development      company    engaged       in    providing     software

development and consulting IT services to its clients.               This

company    was   concentrating     on   internet   enabled    business

information systems in a wide range of industries. Resultantly,

this company was included in the list of comparables.


17.2.   After considering the rival submissions and perusing the

relevant material on record, we find from          the description of

business activity of this company as reproduced on internal page

90 of the TPO's order, that it is a pure       software development

service provider. In the absence of any other specific objection

against this company, we are of the considered opinion that this

company has been rightly included by the TPO in the list of

comparables. The assessee fails.




                                 21
                                                      ITA No.5645/Del/2011


Celestial Labs limited:


18.1.   The TPO included this company in the list of comparables

by observing that it was rendering mainly software development

services.


18.2.   After considering the rival submissions and perusing the

relevant material on record, we find from the annual accounts of

this company, a copy of which is available on page 41 of the

paper book, that it is engaged mainly in the developing the

software products in the shape of tools etc., which are protected

using the patent. This company developed a tool, "CELSUITE" to

drug discovery in finding the lead molecules for drug discovery.

As this company is engaged in developing software tools after

enough research and development activity and the tools so

produced by it are its intellectual property,         it cannot be

considered as comparable to the assessee which is, also albeit in

software development, but is doing it on contract basis without

having any I.P. rights in the software developed by it. It is further

relevant to note that this company has been held to be not

comparable by the Dispute Resolution Panel (DRP) in its


                                 22
                                                      ITA No.5645/Del/2011


Directions for a subsequent year, a copy of which is available on

record.    Thus this company can't be considered as functionally

similar to that of the assessee. We, therefore, direct to exclude

this company from the list of comparables. The assessee

succeeds.


Datamatics Limited:


19.       The assessee has no objection to the inclusion of this

company in the list of comparables.


E-Zest Solutions Limited:


20.1. The annual report of this company was available, but, the

functionality was not clear. Notice u/s 133(6) was issued by the

TPO. On receipt of reply from the company, it was noticed that it

was engaged in software development services and, hence,

qualified all the filters applied by the TPO.   After considering the

objections of the assessee, the TPO held it to be includible in the

list of comparables. The DRP upheld the draft order on this count.


20.2.     After considering the rival submissions and perusing the

relevant material on record, we find this company to be


                                  23
                                                   ITA No.5645/Del/2011


comparable to that of the assessee company, because it is also

engaged in rendering software development services to outsiders.

The ld. AR needlessly tried to distinguish this company by

contending that the services rendered by it were different from

that of the assessee. We do not find any force in this submission.

The comparability of a company is tested on various parameters

and a view is taken as to its comparability or otherwise by

considering the entirety of the facts and circumstances. Simply

because the nature of software development services provided by

a company is different from those provided by the assessee, the

same does not become incomparable.       Here is a case in which

this company is also providing software development services as

is done by the assessee on contract basis for others without

having any intellectual property rights in them. A small variation

in the nature of services does not make a company incomparable.

It is not a case that the TPO has considered a company rendering

managerial or engineering services and treated it as comparable

to the assessee rendering software development services. Merely

because the nature of service rendered by this company within

the overall software development services, is not identical, will

                                24
                                                    ITA No.5645/Del/2011


not make it incomparable, when it is otherwise similar to that of

the assessee on all other scores. As such, we hold that this

company was rightly included by the TPO in the list of

comparables. The assessee fails.


Flextronics Software Systems Limited (Products and Services

segment):


21.1.   This company was finding place in the accept/reject matrix

of the assessee, but was rejected in the TP study report because

it failed R&D spend filter. The TPO noticed that the "Products

and service segment" of this company was comparable to that of

the assessee. As the product revenue was ` 92.1 crore out of the

total product and service segment revenue of ` 847.2 crore, the

TPO held this company to be comparable.           The assessee's

objection that this company had incurred huge R & D expenses

and, hence, should be ignored, did not find favour with the TPO.

The DRP approved the view taken by the authorities below on the

comparability of this case.


21.2.   After considering the rival submissions and perusing the

relevant material on record, we find this company to be not

                                25
                                                    ITA No.5645/Del/2011


comparable to that of the assessee.      The reason for our this

decision is that the TPO has taken segmental data of `Product and

service segment' of this company which has Product revenue of `

92.1 crore. In contrast to it, the instant assessee is not selling

any software products, but, is doing the job assigned to it on cost

plus basis. The contention of the ld. DR that since the majority of

the revenue from `Product and services segment' was from the

services segment and, hence, this company should be considered

as comparable, is bereft of any force. When figures of Products

and services are combined, it cannot be ascertained as to how

much contribution was made by the product division or the

service division to the overall revenue of the Product and services

segment. As the assessee is admittedly not engaged in selling its

software products, such a company cannot be considered as

comparable. It can be seen from the annual report of this

company, a copy of which is available on page 88 of the paper

book, that it consolidated its existing product portfolio and took

steps to expand into further technologies by increasing the

momentum in key initiatives in WIMAX, IMS, SIP & ISS/ESS

domains. This company has its own products such as ASN,

                                26
                                                        ITA No.5645/Del/2011


WIMAX, Gateway Product with ASN Light. It is further relevant to

note that the year ending of this company is not coinciding with

that of the assessee and it is not known as to how the TPO has

adopted the relevant figures for comparison.       In view of the

foregoing discussion, we hold this company to be not comparable

and direct its exclusion from the list of comparables. The

assessee succeeds.


Geometric Limited (Segmental):


22.    The assessee has no objection to the inclusion of this

company in the list of comparables.


Helios & Matheson Information Technology Limited:


23.1. The TPO noticed from the annual accounts of this company

that it was engaged in the software development services and

also qualified employee cost filter. The assessee objected to its

inclusion by, inter alia, contending that the PLI of this company

was incorrectly worked out by the TPO. Correcting this mistake in

calculation part, the TPO held this company to be comparable and

determined its revised PLI at 36.63%.        The DRP upheld the

inclusion of this company in the list of comparables.
                                 27
                                                   ITA No.5645/Del/2011


23.2.    After considering the rival submissions and perusing the

relevant material on record, we find from the annual accounts of

this company that it is engaged in rendering ITES BPO services,

Application management services, Offshore delivery, Project

management services, Public sector services, Maritime practice

and Executive education information systems, etc.        From the

above narration of the nature of services rendered by this

company, it can be seen that the same is not at all comparable to

that of the assessee. It can further be noticed that the TPO has

taken the figures of this company which represent `Income from

software sales and services'.      Obviously, the assessee is not

engaged in software sales. In view of our above discussion while

dealing with the comparability of Flextronics Software Systems

Limited, we are satisfied that this company cannot be considered

as comparable and is, hence, directed to be excluded from the list

of comparables. The assessee succeeds.


IGate Global Solutions Limited:


24.     The assessee has no objection to the inclusion of this

company in the list of comparables.


                                  28
                                                    ITA No.5645/Del/2011


Infosys Technologies Limited:


25.   From the nature of services rendered by the assessee to its

AE on a cost plus basis without having any intangible assets or

retaining any intellectual property in the work done by it, we find

that Infosys Technologies Ltd., which is a giant company in terms

of risk profile, scale, nature of services, revenue ownership of

branded/proprietary products, onsite and offshore services, etc.,

cannot be compared with the assessee. Our view is fortified by

the judgment of the Hon'ble jurisdictional High Court in the case

of CIT vs. Agnity India Technologies Pvt. Ltd. [(2013) 219 Taxman

26 (Del)]     in which Infosys Ltd. has been held to be not

comparable to a company that was engaged in the business of

development of software for parent company.        We, therefore,

direct the exclusion of this case from the list of comparables. The

assessee succeeds.


Ishir Infotech Limited:


26.1. The AO included this company in the list of comparables by

observing that it qualified 25% employee cost filter and all other

filters on the basis of information received u/s 133(6). The

                                29
                                                            ITA No.5645/Del/2011


assessee objected to the inclusion of this company by contending

that its related party transactions were more than 15% and

employees cost was only 4%.               The TPO rejected both the

contentions by noticing that the employees cost was, in fact,

more than 25% as was apparent from the information received

u/s 133(6) and, further, the RPTs also did not exceed 25%.


26.2.     Having heard both the sides and perused the relevant

material on record, we find this company to be comparable to

that of the assessee.      The assessee's objection that employee

cost of this company was 4% only, is not correct because of the

exercise carried out by the TPO indicating that the employees

cost was more than 25%. The ld. DR has taken us through the

Annual accounts of this company which show that some part of

the     employees   cost   was   also     included     in   `Administrative

expenses' apart from direct Establishment expenses.               It can be

seen that the company has included Professional fees of ` 3.41

crore    along   with   Director's   salary,   etc.,   under     the     head

`Administrative expenses'. When this objection was taken by the

assessee before the TPO that the employee cost was only 4%

viewing only the `Establishment expenses' in isolation without
                                     30
                                                     ITA No.5645/Del/2011


considering   the   employee    cost   included   under    the    head

`Administrative expenses', the TPO corrected the position by

observing that the employee cost was more than 25% by

impliedly including the personnel cost included under the head

`Administrative expenses'.     The assessee did not challenge the

TPO's calculation before the DRP on this issue.           As such, it

becomes apparent that there is no merit in this objection again

taken up before us which has already been successfully dealt with

by the TPO. Insofar as the assessee's objection about the related

party transactions is concerned, we have discussed this issue

thoroughly while dealing with the comparable case of Accel

Transmatics Ltd. (supra) in which it has been held that filter of

25% of RPT is good enough to make a controlled transaction and

thus expunging it from the list of comparables, which can only be

uncontrolled transactions.     The ld. AR failed to point out any

functional difference of this company vis-a-vis the assessee. As

such, we approve the view taken by the TPO in including this case

in the list of comparables. The assessee fails.




                                  31
                                                      ITA No.5645/Del/2011


KALS Information Systems Limited (Segmental):


27.1.   The TPO observed that this company was engaged in

Software development and training.      As the software products

constituted only 3% of its revenue and training revenue

constituted 8.56%, the TPO held that this segment of KALS

Information Systems Limited was rightly includible.


27.2.   After considering the rival submissions and perusing the

relevant material on record, it is an admitted position that the

TPO adopted Software development segment of this company by

noticing that this segment also included revenues from software

products and training. In view of the fact that the assessee is not

engaged in imparting any training on commercial basis or selling

its software products, we hold that the financials of this company

under this segment cannot be compared with the assessee. The

contribution by the sale of software products or training to the

overall revenue of this segment cannot be precisely ascertained

to determine the question of its comparability. As such, this case

is directed to be excluded. The assessee succeeds.




                                32
                                                    ITA No.5645/Del/2011


LGS Global Limited (Lanco Global Solutions Limited):


28.     The assessee has no objection to the inclusion of this

company in the list of comparables.


Lucid Software Limited:


29.1. The TPO noticed that this company was a pure software

development services company and did not have any related

party transactions. On being called upon to explain as to why this

company be not treated as comparable, the assessee replied that

Lucid Software Limited has developed `Muulam' software, the

details of which were collected from the website of Lucid Software

itself. In view of such details, it was contended that this company

was a software product company having intellectual property

rights. Rejecting the assessee's objections, the TPO included this

company in the list of comparables.


29.2.   After considering the rival submissions and perusing the

relevant material on record, it can be seen that the assessee

categorically objected before the TPO to the effect that this

company was mainly into software product business having

license of such products.      The TPO ignored the assessee's
                                33
                                                     ITA No.5645/Del/2011


submissions despite the fact that sufficient material taken from

the website of this company was placed before him in support of

the contention. It can be seen from page 192 of the paper book,

being Notes to the balance sheet of Lucid Software Ltd., that this

company developed software products in-house. The expenditure

so incurred on product development has been duly capitalized by

Lucid Software Ltd.     These facts amply bring out that Lucid

Software Ltd. cannot be considered as comparable.                  We,

therefore, direct the exclusion of this case from the list of

comparables. The assessee succeeds.


Mediasoft Solutions Limited:


30.     The assessee has no objection to the inclusion of this

company in the list of comparables.


Megasoft Limited (Consulting/Blue Alley Division):


31.1.    The TPO, on perusal of data of this company available in

the Prowess and also on consideration of information received u/s

133(6) observed that this company was engaged in software

development services under its Consulting division. The assessee

objected to its inclusion before the TPO on the ground that there
                                34
                                                     ITA No.5645/Del/2011


was restructuring inasmuch as there was acquisition of some

other companies during the year.         Not convinced with the

assessee's objection, the TPO included this company in the list of

comparables.


31.2.    Having heard the rival submissions and perused the

relevant material on record, we find from the Director's report of

this company, a copy of which is available on page 193 of the

paper book, that the financial results for the year include the

business performance of Visual Soft Technologies Ltd. w.e.f. 1st

October, 2006 consequent to the amalgamation.          The Mumbai

Bench of the Tribunal in Petro Araldite (P) Ltd. vs. DCIT [(2013)

154 TTJ (Mum) 176] has held that a company cannot be

considered as comparable because of exceptional financial results

due to mergers/demergers etc.        Since the financial results of

Megasoft Ltd. have the impact of the merger of Visual Software

Technologies Ltd., w.e.f. 1st October, 2006, obviously, this

company cannot be considered as comparable. Accordingly, this

company is directed to be excluded. The assessee succeeds.




                                35
                                                     ITA No.5645/Del/2011


Mindtree Limited:


32.    The assessee has no objection to the inclusion of this

company in the list of comparables.


Persistent Systems Limited:


33.   After considering the rival submissions and perusing the

relevant material on record, we hold that this company also

cannot be considered as comparable because of merger of

another company into it, which fact is evident from page 196 of

the paper book. It can be seen that a subsidiary company was

merged into this company pursuant to judgment of Hon'ble

Bombay High Court w.e.f. 1.4.06.       Because of the merger of

subsidiary into this company, we hold that the financial position of

this company cannot be construed as normal capable of a good

comparison.    Following the Mumbai Bench decision in Petro

Araldite (P) Ltd. (supra), we direct the exclusion of this company

from the list of comparables. The assessee succeeds.




                                 36
                                                   ITA No.5645/Del/2011


Quintegra Solutions Limiteda:


34.     The assessee has no objection to the inclusion of this

company in the list of comparables.


R S Software (India) Limited:


35.     The assessee has no objection to the inclusion of this

company in the list of comparables.


R Systems International Ltd. (Segmental):


36.1.   The TPO included this company in the list of comparables

and determined its OP/OC at 15.07%. The ld. AR has no objection

to the inclusion of this company in the list of comparables. His

only objection was confined to the calculation of OP/OC at

15.07%.    He contended that the TPO erred in excluding the

amount of `Provision for doubtful debts' from Operating costs.


36.2.   We are not agreeable with the contention advanced on

behalf of the assessee for the reasons set out by the TPO on this

issue at page 126 of his order. It has been mentioned that the

provision for doubtful debts/advances was excluded because

these were not recurring for the last three years and were also

                                37
                                                     ITA No.5645/Del/2011


not at consistent level.    We fail to appreciate as to how a

`Provision for doubtful debts' can be considered as a part of

operating cost unless it is shown that the actual expenditure on

account of bad debts was equal to such amount of provision.

Nothing of this sort has been proved on behalf of the assessee.

As such, we hold that the TPO was justified in excluding the

`Provision for doubtful debts/advances' from total operating cost.

This contention raised on behalf of the assessee is repelled.

Resultantly, this company is held to be rightly included in the list

of comparables with the correct percentage of OP/OC at 15.07%.

The assessee fails.


Sasken Communication Technologies Limited (Segmental):


37.   After considering the rival submissions and perusing the

relevant material on record, we find that this company acquired

Botnia Hitec Oyoy, Finland and its two wholly owned subsidiary

companies during the year, which fact is apparent from the

Director's report of this company available at page 202 of the

paper book.     Following the Mumbai Bench decision in Petro




                                 38
                                                   ITA No.5645/Del/2011


Araldite (P) Ltd.(supra), we order for the exclusion of this

company from the list of comparables. The assessee succeeds.


SIP Technologies & Exports Limited:


38.     The assessee has no objection to the inclusion of this

company in the list of comparables.


Tata Elxsi Ltd. (Software development and services segment):


39.1.   The TPO included this company in the list of comparables

by noticing that its `Software development and services segment'

matched with the assessee. On being called upon to explain as to

why this company be not included in the list of comparables, the

assessee stated that the nature of activity done by this company

was different inasmuch as it was engaged in R&D activities also

which resulted in creation of intellectual property. Not convinced

with the assessee's submissions, the TPO included this segment

of the company in the list of comparables.


39.2.   After considering the rival submissions and perusing the

material on record, we find from page No.206 of the paper book,

which is Annexure to the Director's report of this company, that


                                39
                                                       ITA No.5645/Del/2011


the nature of its activity is quite distinct from that of the

assessee. It can be seen that this company is into development

of hardware and software for embedded products such as multi-

media and some other electronics, etc.         Apart from that, this

company    is   also   engaged   in   making    some     programmes

developing technology intellectual property.      As the nature of

activity carried out by the assessee in question is nowhere close

to that of Tata Elxsi Ltd., we hold that this company cannot be

included in the list of comparables. Accordingly, this company is

directed to be excluded. The assessee succeeds.


Thirdware Solutions Limited (Segmental):


40.    The assessee has no objection to the inclusion of this

company in the list of comparables.


Wipro Limited (IT Services segment):


41.   After considering the rival submissions and perusing the

relevant material on record, we have absolutely no doubt in our

mind that this company cannot be considered as comparable to

the assessee inasmuch as it is a giant company in terms of

parameters discussed above while dealing with the case of
                                 40
                                                     ITA No.5645/Del/2011


Infosys Ltd. The Hon'ble Delhi High Court in the case of Agnity

India Technologies Pvt. Ltd. (supra) has upheld the exclusion of

this company also from the list of comparables on the basis of

certain parameters,    which are fully applicable to the instant

assessee as well. It is, therefore, directed to exclude this company

from the list of comparables. The assessee succeeds.


42.    In view of the foregoing discussion, we set aside the

impugned order and remit the matter to the file of TPO/AO for a

fresh determination of ALP of the assessee's international

transactions in consonance with the directions given hereinabove

in the matter of inclusion or exclusion of the 26 comparables

companies taken by the TPO as comparables.


43.   Apart from assailing the inclusion or otherwise of the above

referred 26 companies, no argument was advanced by the ld. AR

on any other issue raised through some other grounds. These

grounds, therefore, stand dismissed.     It implies that the view

taken by the TPO as approved by the DRP on all other issues in

the computation of ALP is final and does not require any

interference.


                                 41
                                                            ITA No.5645/Del/2011


44. In the result, the appeal is partly allowed for statistical

purposes.


The order pronounced in the open court on 26.08.2014.



               Sd/-                                             Sd/-

     [GEORGE GEORGE K.]                                  [R.S. SYAL]
       JUDICIAL MEMBER                               ACCOUNTANT MEMBER


Dated: 26th August, 2014.

Dk




Copy forwarded to:
  1. Appellant
  2. Respondent
  3. CIT
  4. CIT (A)
  5. DR, ITAT
                                                      AR, ITAT, NEW DELHI.


                                              Date
1.       Draft dictated on                21.8.14
2.       Draft placed before the author   22.8.14
3.       Approved Draft comes to the
         Sr.PS/PS
4.       File sent to the Bench Clerk
5.       Date on which file goes to the
         Head Clerk.
6.       Date on which file goes to the
         AR
7.       Date of dispatch of Order.
*

                                           42

 
 
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