Autodesk India (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle 11 (1), Bangalore

ORDER

N.V. Vasudevan, Judicial Member - IT(TP)A Nos.540/B/13 and 616/B/13 are cross appeals filed by the assessee and revenue respectively for the assessment year 2005-06, while IT(TP)A Nos.541/B/13 and 617/B/13 are cross appeals filed by the assessee and revenue respectively for the assessment year 2008-09. The former cross appeals are directed against the order of the CIT(Appeals)-IV, Bengaluru dated 20.02.2013, while the latter cross appeals are also directed against the order of the same CIT(Appeals)-IV dated 21.02.2013. All these appeals were heard together and are being disposed of by this consolidated order for the sake of brevity and convenience.

2. The brief facts relating to all these appeals are that the Assessee was set up as a subsidiary of Autodesk Inc., USA ('Autodesk US' for short), in October 1998 and is engaged in the business of providing software development (technical support) services and marketing support services to its overseas Associated Enterprises ('AE' for short). Being a captive service provider, the Assessee assumes less than normal risks and all significant business and entrepreneurial risks are borne by the AEs. It is not in dispute that the transaction of rendering of software development services by the Assessee to its AE was an international transaction and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transaction has to be determined having regard to Arms Length Price (ALP). The issues to be decided in the cross appeals for both the AYs 2005-06 and 2008-09 is the determination of ALP of the international transaction of providing software development services by the Assessee to its AE.

IT(TP)A Nos.540/B/13 and 616/B/13 (AY 2005-06)

3. During the previous year 2004-05 relevant to the assessment year 2005-06, the Assessee rendered software development (technical support) to its AEs. As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of Rs.10,64,79,286/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction is at Arm's Length, the Assessee filed a Transfer Pricing study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The profit level indicator (PLI) chosen for the purpose of comparison of profit margin of comparable companies was operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was Rs.10,64,79,286. The Operating cost of the Assessee was Rs.9.67,99,350/-. The operating profit was thus Rs.96,79,936 (Rs.10,64,79,286 - Rs.9,67,99,350). OP/OC was 10%. The Assessee in its TP Study had chosen 18 companies as comparable companies, after applying the following filters

Filters applied by the Assessee in its TP study:

The arithmetic mean of the profit margin of the 18 companies so selected by the Assessee was 9.73%. Since the Assessee's profit margin was 10%, the Assessee claimed that the price charged in the international transaction was at Arm's Length and therefore no addition by way of adjustment to ALP should be made.

4. The Assessing Officer (AO) referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is required by the provisions of Sec.92CA of the Act. Out of the above 18 comparables, the TPO accepted 3 companies viz., Geometric Software Solutions Co. Ltd., R.S. Software Ltd. and Visualsoft Technologies Limited, and rejected the other 15. In choosing comparable companies, the TPO applied the following filters:

The TPO on his own selected 14 more companies as comparable companies and arrived at a final list of 17 comparable companies whose arithmetic mean of profit margin was 26.56% before working capital adjustment and 24.57% after working capital adjustment. The following table will show the final list of comparable companies and their profit margin and computation of arithmetic mean of profit margin of these 17 comparable companies.

Comparables selected by the TPO and their arithmetic mean:

5. The TPO computed the addition to be made to the total income on account of determination of ALP at Rs. 1,41,03,664/- as follows:

Computation of arm's length price by TPO and the adjustment made:

6. The addition suggested by the TPO was added to the total income of the Assessee by the AO. Aggrieved by the order of the AO making the aforesaid addition, the Assessee preferred appeal before CIT(A). The Assessee contended before CIT(A) that the Assessee which has a turnover of just Rs.10.64 Crores cannot be compared with companies whose turnover is more than Rs.200 crores. The CIT(A) accepted the above contention and he held that turnover filter has to be applied by adopted the turnover at the upper and lower ends, i.e., the range of Rs.1 crore to Rs.200 crores. Consequently, the following 5 companies whose turnover was admitted above Rs.200 crores, out of the 17 companies finally chosen by the TPO stood excluded.

It may be mentioned here that although the turnover of iGate Global Solutions Ltd. ('iGate' for short) for FY 2004-05 was Rs.406 crores and would thus stand excluded on application of the turnover filter at Rs. 200 crores, as was directed to be applied by the CIT(A), the CIT(A) inadvertently did not specifically set out that iGate would be so excluded. However, as can be seen from the set of final comparables selected by the CIT(A) at page 45 of the order, iGate has been excluded therefrom.

7. It was further contended by the Assessee before CIT(A) that the following two companies, namely, Exensys Software Solutions Ltd. and Thirdware Solutions Ltd., should be excluded because their profits were very abnormal i.e., beyond 50%. This claim of the Assessee was accepted by the CIT(A) and these two companies were excluded for having abnormally high profits (beyond 50%).

8. The Assessee contended before CIT(A) that companies whose profits were diminishing or who were making consistent losses should be excluded. The CIT(A) accepted the contention of the Assessee that increasing revenues do not necessarily reflect better performance and, therefore, disapproved the use of this filter by the TPO. However, despite the same, Melstar Information Technologies Ltd., one of the comparables selected by the Assessee in its TP Study but which was rejected by the TPO on application of the above filter, was not directed to be included in the list of comparables as a result of having rejected application of this filter.

9. The Assessee contended before CIT(A) that wherever the companies chosen as comparable had transaction of the value of 10% of its total revenues with related parties, the related party transaction filter (RPT) should be applied and such companies should be excluded from the list of comparable companies. The CIT(A) rejected the contention of the Assessee that companies with related party transactions ('RPT' for short) greater than 10% of revenues would have to be rejected and, instead, upheld the TPO's action in applying the threshold at 25% of revenues.

10. On functional comparability, the CIT(A) accepted the contention of the Assessee that Bodhtree Consulting Ltd. and Tata Elxsi Ltd. were functionally different to the Assessee and thus directed their exclusion. However, the Assessee's contention that Sankhya Limited was not functionally comparable to it was not considered by the CIT(A).

11. Another issue raised by the Assessee before CIT(A) was that in computing the PLI of the Assessee or the comparable companies, the foreign exchange gain or loss should be considered as operating profit or loss as the case may be. The CIT(A) held that the margins of the remaining comparables and that of the Assessee would need to be recomputed by the AO after excluding / including foreign exchange loss / gain for the relevant year, as the case may be, on the basis that such gains or losses are operating in nature.

12. The CIT(A) directed the AO to provide for an adjustment to the margins of the remaining companies on account of working capital differences between that of the Assessee and the companies, as had been done by the TPO.

13. After giving effect to the above directions of the CIT(A), the following companies would alone remain as comparable companies and their respective margins, inclusive of forex loss or gain, as the case may be, are as follows:

14. The Assessee and the Revenue are aggrieved by some of the directions of the CIT(A) and have filed appeals before the Tribunal. As far as the Revenue's appeal is concerned, the grievance of the Revenue is as follows:

15. As far as the Assessee's appeal is concerned, the grievance projected in the appeal by the Assessee is as follows:

16. The grounds of appeal in the Assessee's and Revenue's appeal as stated above are the only grounds that require adjudication. The other grounds of appeal in the appeals by the revenue or Assessee are either general in nature or consequential or academic or were not pressed for adjudication hence require no adjudication. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The submissions were reiteration of contentions that were put forth before the TPO/DRP and the order of the TPO and DRP in so far as the conclusions in the respective orders are in line with the stand taken by the respective parties in the grounds of appeal. We will deal with the contentions to the extent it is necessary, when we deal with the individual grounds of appeal.

IT(TP)A No.616/Bang/2013: Revenue's appeal for AY 2005-06

17. The first issue to be decided in Revenue's appeal is the application of turnover filter for exclusion of companies that are otherwise found to be functionally comparable. The Grievance of the revenue in this regard is projected in Gr.No.2 of the Grounds of appeal raised by the revenue in its appeal. The basic facts to be noticed with regard application of turnover filter are that the Assessee's turnover for the relevant previous year was Rs.10.65 crores. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the CIT(A) was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The CIT(A) agreed with the submission of the Assessee and he excluded the following 5 companies whose turnover was above Rs.200 Crores from the list of comparable companies, viz., (i) Flextronics Ltd., (ii) L & T Infotech Ltd., (iii) M/s. Infosys Technologies Ltd., (iv) Satyam Computer Services Ltd., (v) iGate Global Solutions Ltd. The CIT(A) in coming to the above conclusion placed reliance on the decision of the ITAT Bangalore in the case of Genisys Integrating Systems (India) (P) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) wherein it was held when there is a limit for the lower end for identifying the comparable companies, there is no reason why there should not be an upper limit also, as size matters in business.

17.1 The learned DR submitted that high turnover is not a relevant criterion to regard a company as not comparable, so long as the two companies are functionally comparable. If functions by two companies are identical then they have to be regarded as comparable. According to him therefore the CIT(A) was not justified in excluding 5 companies on the ground that their turnover was above Rs.200 Crores and cannot be compared with the Assessee whose turnover was around Rs.10.65 Crores. In support of his contention the learned DR placed reliance on the following decisions:

17.2 The learned DR also filed before us a note contending that in software industry, size has no influence on the margins earned by an entity. According to him economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. According to him, in software industry, size does not matter, what matters is the human capital. According to him application of the filter of turnover might be justified for excluding companies with low turnover of say Rs.1 crore or less because the margin earned by these companies might widely fluctuate due to narrow capital base and lack of competitive strength, lack of operational efficiencies and also lack of human resources. They also escape the eyes of regulators. He drew our attention to the turnover and profit margins of company Infosys Technologies Ltd. For FY 1997 to 2010 and submitted that in FY 1997 the company had turnover of Rs.139 Crores and its profit margin was 34.95% whereas in FY 2010 its turnover was Rs.21140 crores but its profit margin was only 44.91%. According to him therefore the profit margins hover between 35% and 40% over the period of 15 years and therefore high turnover does not necessarily mean high profit margins. He also gave a chart showing turnover and margin of 20 companies in the IT-BPO industry for three years. According to him the chart would show that for the same range of turnover companies earned different profit margins. Therefore according to him there is no relation between the margins earned and the turnover of a company. According to him software industries operate on the basis of cost plus margin of profits and therefore turnover would be irrelevant and have no impact of the profit margins. His further submission was that under Rule 10B(3) of the Income Tax Rules, 1962 (Rules) it is only functions performed, assets employed and the risks assumed that are relevant criteria for comparison and turnover is not a prescribed criterion for the purpose or comparison. He fairly admitted that there are differences of opinion amongst various benches of the Tribunal on the application of turnover filter and that some Benches have held that high turnover was relevant criteria for excluding comparable companies. His prayer in the alternative was for constitution of a special bench to resolve the conflict.

17.3 Per Contra the learned counsel for the Assessee submitted that ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. v. Dy. CIT [2018] 89 taxmann.com 44 order dated 13.10.2017, considered the various aspects of application of turnover filter for excluding companies and has noted that the first decision rendered on application of this filter was in the case of Genisys Integrating Systems (I)(P) Ltd. (supra) rendered on 5.8.2011. In the case of Dell International Services India (P) Ltd. (supra), the tribunal took note of a divergent view expressed by ITAT Bangalore Bench in the case of Robert Bosch Engg. and Business Solutions Ltd. v. Dy. CIT ITA No.1519/Bang/2013 order dated 13.9.2017 after considering the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India (P.) Ltd. v. Dy. CIT [2017] 82 taxmann.com 167 (Delhi - Trib.) , that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The Tribunal in the case of Dell International (supra) also took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 243 (Bang. - Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India (P.) Ltd. (supra) and the decision to the contrary in the case of CIT v. Pentair Water India (P.) Ltd. [2016] 69 taxmann.com 180/381 ITR 216 (Bom.) wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water India (P.) Ltd. (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra):

'41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:—

"9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study."

42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference.'

17.4 His submission was that the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India (P.) Ltd. (supra) was not on the application of turnover filter. He brought to our notice that the relevant substantial question of law in the case of Christcapital decided by the Hon'ble Delhi High Court was (i) whether comparables can be rejected on the ground that they have exceptionally high profit margins as compared to the Assessee in Transfer Pricing Analysis.(ii) Whether factors like differential functional and risk profile coupled with high degree of volatility in operating profit margins is sufficient ground to reject comparables for transfer pricing analysis. In answering the above question, the Hon'ble Court however at page 218 of the report (the said decision is Chryscapital Investment Advisors India (P.) Ltd. (supra)) observed that the mere circumstance that a company-otherwise confirming to the stipulations in rule 10B(2) of the Rules in all details, presenting a peculiar feature- such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The Court further observed that the Transfer Pricing officer, first, has to be satisfied that such differences do not "materially affect the price …….… or cost". Secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. According to him therefore the observations of the Hon'ble Delhi High Court in so far as it relates to application of turnover filter are obiter dictum. Obiter dictum though is entitled to a weight cannot be equated with ratio decidendi of a case. In support of his contention as above, he relied on the decision of the Hon'ble Supreme Court in the case of Director of Settlements A.P. v. M.R. Apparao [2002] 4 SCC 638. Countering the submission of the learned DR that the decision of the Hon'ble Bombay High Court rendered in the case of Pentair (supra) is not ratio decidendi as it was merely dismissal of appeal u/s.260A of the Act on the ground that no substantial question of law arose for consideration, learned counsel drew our attention to the decision of the Bombay High Court in the case of Pentair water India (P.) Ltd. (supra) paragraph 9, wherein the Hon'ble Bombay High Court after referring to a decision of the Hon'ble Delhi High Court rendered in the case of Cit v. Agnity India Technologies Pvt. Ltd…. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi) , clearly observed that turnover is obviously a relevant fact to consider the comparability. Our attention was also drawn to paragraph-3 of the decision rendered in the case of Pentair (supra) wherein the department specifically contended that the Tribunal erred in holding that size and turnover of a company are deciding factors for treating a company as comparable. According to him therefore it was not a case of merely dismissal of appeal u/s.260A of the Act as unadmitted on the ground that no substantial question of law arose for consideration but was precedent in so far as the Hon'ble Court has expressed a clear opinion on the issue.

17.5 The learned counsel for the Assessee also drew our attention to a decision of the Hon'ble Delhi High Court rendered in the case of Pr. CIT v. New River Software Services (P) Ltd. [2017] 85 taxmann.com 302 wherein the Hon'ble Delhi High Court followed the decision of the Hon'ble Bombay High Court rendered in the case of Pentair (supra) and held that Infosys BPO was rightly excluded as not being a comparable company. Our attention was also drawn by him to a decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Mercer Consulting (I) (P) Ltd. [2016] 76 taxmann.com 153/390 ITR 615 wherein the Hon'ble Court held that a giant company cannot be compared with a company which was a captive service provided assuming limited risks.

17.6 As far as the decisions of the Tribunal rendered on the application of turnover filter that are contrary to the decision rendered in the case of Genisys Integrating Systems (supra), the first submission of the learned counsel for the Assessee was that those decisions were rendered at a later point of time and were to be regarded as per incurium since these decisions were also rendered by a bench of equal strength and either the subsequent decisions refused to follow or were rendered in ignorance of an earlier binding precedent. He submitted that if a bench of equal strength differs with a view taken earlier, the proper course for them is to make a reference to larger bench. They cannot refuse to follow a binding decision. If they do so, the decisions so rendered have to be regarded as per incurium. Even if they are rendered in ignorance of the earlier binding precedent, they have to be regarded as per incurium. In this regard the learned counsel for the Assessee placed reliance on the decisions of Hon'ble Supreme Court in the case of Union of India v. Raghubir Singh AIR 1989 SC 1933, Union of India v. S.K. Kapoor [2011] 4 SCC 589 and Sundeep Kumar Bafna v. State of Maharashtra [2014] 16 SCC 623. In the aforesaid decisions the Hon'ble Supreme Court held that in a situation where there are conflicting decisions of High Court on an issue which are irreconcileable and pronounced by judges of co-equal strength, then the earlier view has to be followed as the later decision has to be regarded as per incuriam. The Hon'ble Supreme Court in the case of Sundeep Kumar Bafna (supra) held that a decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench and when High Courts encounter two or more mutually irreconcilable decisions of the Supreme Court cited at the Bar, the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam. The following were the relevant observations of the Hon'ble Supreme Court:

"19. It cannot be over-emphasised that the discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule is of great importance, since without it, certainty of law, consistency of rulings and comity of Courts would become a costly casualty. A decision or judgment can be per incuriam any provision in a statute, rule or regulation, which was not brought to the notice of the Court. A decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench; or if the decision of a High Court is not in consonance with the views of this Court. It must immediately be clarified that the per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam."

It was therefore submitted by him that the earliest view rendered by the ITAT Bangalore Bench in the case of Genisys Integrating (supra) should be followed.

17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.

17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).

18. As far as Ground No.3 raised by the Revenue in its appeal is concerned, the Revenue is challenging the CIT(A)'s action in excluding Exensys Software Solutions Ltd. ('Exensys' for short) and Thirdware Solutions Ltd. ('Thirdware' for short) on the basis of their abnormal profit margins in FY 2004-05. The submission of the learned DR was that abnormally high profits cannot be a ground per se to reject a company as comparable company, when it is functionally found to be comparable, unless there are some extraordinary events or circumstances that lead to high profits. We agree with the learned DR that exclusion of companies which are otherwise functionally comparable cannot be excluded on the ground that its profits were abnormal, unless the abnormality is owing to extraordinary events that take place in the relevant previous year, like mergers/amalgamation etc. To this extent the order of the CIT(A) is not proper. The learned counsel for the Assessee submitted that the above companies were rightly excluded by the CIT(A) as their abnormally high margins were occasioned by extraordinary circumstances for which no adjustment can be made to eliminate the material effect of such circumstances. It was brought to our notice that the comparable company Exensys is concerned, a company by name Holool India Ltd. amalgamated with it during FY 2004-05 which increased the margin of Exensys. We have considered the rival submission and in view of the uncontroverted fact regarding another company amalgamating with this company and consequent abnormal profit of this company, this company was rightly directed to be excluded by the CIT(A). We find no grounds to interfere with the order of CIT(A) in this regard. As far as the company Thirdware is concerned, no such extraordinary events were brought to our notice and therefore this company ought not to have been excluded by applying the filter of high profits owing to extraordinary events that occurred during the relevant previous year. To this extent of exclusion of Thirdware as done by the CIT(A) is incorrect and the ground of appeal of the revenue to this extent is accepted.

19. As far as Gr.No.4 and 5 raised by the Revenue is concerned, no companies were directed to be included as a result of rejection of the different financial year ending and employee cost filters, therefore these grounds in the Revenue's appeal become academic and is dismissed as such.

20. As far as Gr.No.6 raised by the Revenue is concerned, the Revenue in this ground of appeal is challenging the CIT(A)'s action in disapproving the diminishing revenues / persistent losses filter. We have considered the order of the CIT(A) in this regard and find that the TPO applied this filter on the reasoning that by applying this filter, it will eliminate companies which are not in line with the trend of growth witnessed in the software industry. The TPO on the other hand has maintained that the profits of only the relevant previous year (current year data) should be considered for the purpose of comparability. The CIT(A) has rightly observed that revenue may not always be a true indicator of a company's performance as it may also depend on its own business cycle. Thus, the CIT(A) rightly held that a company with increasing revenues over a period of time does not necessarily reflect better performance as increase in expenses in the corresponding period can be higher than that in revenues and, consequently, the company may still incur losses. The CIT(A), has rightly held that, conversely, a company with diminishing revenues over a period of time may not necessarily be performing badly if it still has a good profit margin achieved through cost efficiency. In the light of the above, we are of the view that the action of the CIT(A) in rejecting the application of this filter is right in law and on facts. Therefore, this ground is rejected. The learned counsel for the Assessee brought to our notice that by applying this filter a comparable company Melstar Information Technologies Ltd., was excluded but the said filter was not applicable to the above company. He also brought to our notice that the Assessee in its appeal has raised a ground for inclusion of this company. We shall deal with this aspect when we deal with the relevant ground of appeal in Assessee's appeal.

21. In Gr. Nos.7 & 8 in Revenue's appeal, the Revenue is challenging the action of the CIT(A) in directing the exclusion of Bodhtree Consulting Ltd. ('Bodhtree') and Tata Elxsi Ltd. from the list of comparables. In this regard, we find that the CIT(A) directed their exclusion as being functionally dissimilar to the Assessee as it was engaged in developing Software Products and for the reason that this company was rendering both SWD services and was also in providing Information Technology Enabled Services (ITES) and the break up of the revenues from these two segments was not available. (Vide paragraph 134 to 136 at pages 42 to 43 of his order. We have heard the submissions of the learned DR on Gr.No.8 who relied on the order of the TPO. We find that this company has been excluded from the list of comparable companies in the decision of the Tribunal Bangalore Benches in the case of Sysarris Software (P.) Ltd. (supra) wherein Vide paragraphs 20-21 at pages 7-9 of the said order Bodhtree has been held to be not functionally comparable with a company providing SWD services. Similarly Tata Elxsi Ltd., directed to be removed by the CIT(A) from the list of comparable companies for the reason that this company was providing niche products and services entirely different from the Assessee company. In coming to the above conclusion the CIT(A) has followed the decision of the Mumbai ITAT in the case of Telecordia Technologies (P.) Ltd. v. Asstt. CIT [IT Appeal No.7821 (Mum.) of 2011 vide paragraph 139 of his order at page-44. The learned DR relied on the order of the TPO/AO. We find that the Bangalore ITAT in its decision in the case of Net Devices India Ltd. v. ITO [2015] 63 taxmann.com 94 (Bang. - Trib.) 2005-06 vide paras 18.4.1-18.4.3 at pages 3740 has taken the view that this company was not comparable with a SWD service provider such as the Assessee on the ground that this company was a product company and owning substantial IP rights etc. Following the precedents on this issue rendered on identical facts and circumstances of the present case, we dismiss Gr.No.8 & 9 raised by the Revenue.

22. As far as Gr.No.9 raised by the Revenue in its appeal is concerned, the issue is with regard to correctness of the decision of the CIT(A) in holding that margins of the remaining comparables after giving effect to the directions of the CIT(A) should be computed by the TPO/AO after including foreign exchange loss / gain for the relevant year, as the case may be, since such gains or losses are operating in nature. On this aspect, we find that the CIT(A) has followed decisions of the jurisdictional Bench of this Hon'ble Tribunal in the cases of SAP Labs India (P.) Ltd. v. Asstt. CIT [2010] 8 taxmann.com 207/[2011] 44 SOT 156 (Bang.) and Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2011] 12 taxmann.com 464/47 SOT 45 (URO) (Bang.) which decisions have subsequently been consistently followed by this Hon'ble Tribunal. We therefore hold that there is no error in the order of the CIT(A) and therefore, ground No.9 in the Revenue's appeal is rejected.

23. As far as Ground No.10 raised by the Revenue is concerned, the revenue has contended that the CIT(A) has erred in directing the AO to provide necessary working capital adjustments to the final eight comparable companies. In fact we find that there is no such grievance projected by the Assessee in the grounds of appeal raised before CIT(A), because the AO/TPO had given working capital adjustment in arriving at the profit margins of comparable companies for the purpose of arriving at the arithmetic mean of profit margins of comparable companies. We are therefore of the view that Gr.No.10 raised by the Revenue does not arise out of the order of the CIT(A). Even otherwise, Rule 10B(3) of the Income-tax Rules, 1962, supports the said action of the TPO in granting a working capital adjustment. In the following decisions rendered by the Bangalore Bench of ITAT, viz., TNT India (P.) Ltd. v. Asstt. CIT [2011]10 taxmann.com 161/45 SOT 47 (Bang.) (para 13), Bearing Point Business Consulting (P.) Ltd. v. Dy. CIT [2013] 33 taxmann.com 92/157 SOT 244 (Bang. - Trib.) (para 5.4) and Apigee Technologies (India) (P.) Ltd. v. Jt. CIT [2015] 63 taxmann.com 129 (Bang. - Trib.) (paras 17 to 19) it has been held that adjustment towards working capital differences between the Assessee and the comparables should be considered and appropriate adjustment granted in arriving at the profit margins of comparable companies for the purpose of comparison. Consequently, Ground No.10 raised in the Revenue's appeal is dismissed.

24. In the result, ITA No.616/Bang/2013 is partly allowed.

IT(TP) A No.540/Bang/2013 Assessee's Appeal for AY 2005-06.

25. In Ground No.4(a) the Assessee challenges the action of the CIT(A) in not excluding a company by name Sankhya Infotech Limited from the list of comparable companies for the purpose of comparison of profit margin of comparable companies. The Assessee seeks the rejection of Sankhya Infotech Limited as comparable company on the ground that it is functionally not comparable as it is engaged in the business of development of software products & services and training whereas the Assessee is engaged only in rendering SWD services. The order of CIT(A) does not deal with this company specifically regarding comparability of this company with that of the Assessee. The Assessee in its appeal had challenged the action of the TPO in choosing companies which are not functionally comparable. There are no specific submissions before CIT(A) brought to our notice regarding exclusion of this company on the ground of functional comparability. According to the Assessee, this company focuses on the development of niche products for the transport and aviation industry and that no proper segmental details are available in relation to the said diverse activities. The Assessee has placed reliance on the decision of ITAT Bangalore in the case of Net Devices India (P.) Ltd. (supra) at paras 18.1.1-18.1.3 at pages 33 to 35] wherein it was held that this company is functionally dissimilar to a company providing SWD services in similar circumstances. In view of the precedent on the issue rendered on identical facts and circumstances of the case for the same AY 2005-06, we are of the view that the CIT(A) ought to have excluded this company from the list of comparable companies.

26. In Ground No.4(a) the Assessee has sought exclusion of Exensys Software Solutions Ltd. and Thirdware Solutions Ltd. on the ground that apart from the fact that the profit margins of these companies were abnormally high owing to extraordinary events that happened during the relevant previous year, these two companies have to be excluded on the ground that these two companies are functionally dissimilar to that of the Assessee which is SWD service provider. As far as Exensys Software Solutions Ltd. is concerned, we have already held that the CIT(A) was justified in excluding this company from the list of comparable companies on the ground that its profits were abnormally high owing to extraordinary event of merger/amalgamation that took place during the relevant previous year. Since no such extraordinary events took place, in the case of Thirdware Solutions Ltd., we held that this company ought not to have been excluded on the ground of abnormal profits owing to extraordinary events happening in the relevant previous year. The Assessee now seeks to support exclusion of this company on the ground of functional comparability. There is no discussion in the order of CIT(A) on the functional comparability of this company. It is the plea of the Assessee that Thirdware Solutions Ltd., is engaged in multiple diverse activities in FY 2004-05 including (a) software development services under which the company provides application development, customer relationship management and ERP; and (b) sale of software product and related services, without proper segmental data being available for the said diverse activities and for such reasons Bangalore ITAT in Net Devices India Pvt. Ltd. (supra) at paras 8.1-8.3 and 9.1-9.3 at pages 15-19 and 19-21 respectively] has taken the view that functionally not comparable with a SWD service provider such as the Assessee.

27. In Gr.No.4(a) the Assessee has sought exclusion of Infosys Ltd., Flextronics Ltd. and Satyam Computer Services Ltd. on the ground that these companies were functionally not comparable with the Assessee. These companies were already excluded on the ground that the turnover of these companies were above Rs.200 Crores and therefore ought to be considered as companies operating at different level and hence not comparable. The contention of the Assessee is that even functionally these companies are not comparable with the Assessee which is a SWD service provider for the reason that, Infosys Ltd. and Flextronics Ltd. ought to be excluded as being functionally dissimilar to the Assessee, while Satyam Computer Services Ltd. ought to be excluded as its financial data is unreliable besides being otherwise functionally incomparable to the Assessee. The Assessee has placed reliance on the decision of the Tribunal Bangalore Bench, in Net Devices India Ltd. (supra) paras 11.1-11.2, 17.1-17.3 and 18.5.1-18.5.3 at pages 22-24, 31-33 and 40-41 respectively] in support of its submission that Infosys Ltd., Flextronics Ltd. and Satyam Computer Services Ltd. ought to remain excluded for the above reasons. We are of the view that even on the grounds as stated above, these three companies ought to be excluded from the list of comparable companies in view of the decision referred to by the learned counsel for the Assessee rendered on identical facts for the very same AY 2005-06. We hold and direct accordingly.

28. In Ground No.4 (e) of the grounds of appeal, the Assessee seeks exclusion of Geometric Software Solutions Co. Ltd. and Foursoft Ltd. from the list of comparable companies as these companies have Related Party Transaction (RPT) of more than 15%. The learned DR drew our attention to the decision of the Hon'ble ITAT Bangalore "B" Bench in the case of Robert Bosch Engineering and Business Solutions Ltd. (supra) wherein the Tribunal in paragraph 8 has observed 25% to 15% RPT filter has to be applied depending on availability of comparables. His submission was therefore that companies with RPT of 25% or more alone should be excluded from the list of comparable companies chosen by the TPO and the action of the CIT(A) in excluding comparable companies even in a case where there are single and insignificant RPT was not correct. The learned counsel for the Assessee, on the other hand, pointed out that this Tribunal, in the cases of 24/7 Customer (P.) Ltd. v. Dy. CIT [2012] 28 taxmann.com 258/[2013] 140 ITD 344 (Punj.) Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) and various other cases, has taken a view that comparables having RPT of upto 15% of total revenues can be considered as comparable company. We have considered the rival submission. It is no doubt true that in the case of Robert Bosch (supra) this Tribunal has held that RPT filter can be in the range of 25% to 15% of the total receipts from software development services, depending on availability of comparable companies. It is no body's case that there is dearth of comparable companies in software development services industry. Therefore it would be safe to follow the ruling of this Tribunal in the cases of 24/7 Customer (P.) Ltd. (supra), Sony India (P.) Ltd. (supra) wherein a view has been taken that comparable companies having RPT of upto 15% of total revenues can be considered as comparable companies. In view thereof, the plea of the Assessee requires to be accepted. The TPO/AO are directed to adopt a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently, it is held that comparable companies having RPT upto 15% of the total revenues can be included.

29. The learned counsel for the Assessee made submission regarding the computation of RPT as adopted by the TPO. The submission in this regard on behalf of the Assessee was that these two companies, namely, Geometric Software Solutions Co. Ltd. (`Geometric') and Four Soft Ltd. ('Foursoft') ought to stand rejected since their RPTs are at 19.89% and 22.52% respectively and thus in excess of 15%. Although the RPT% of Geometric has been computed by the TPO to be 11.49%, its RPT%, if correctly computed as per the disclosures in its financial statement, would be 22.52% as stated hereunder: —

We are of the view that it would be just and appropriate to direct the TPO/AO to examine the claim of the Assessee in this regard and if it is found that RPT is more than 15% of the revenues, then this company should be excluded from the list of comparable companies.

30. As regards Foursoft the Assessee has placed reliance on the decision of ITAT Bangalore in the case of Net Devices India Ltd. (supra) at para 18.2 at page 36] wherein Foursoft was excluded on the ground of RPT being more than 15% of the revenue. Following the said decision, we direct Foursoft to be excluded from the list of comparable companies.

31. In the written submissions filed before the Tribunal, the Assessee has submitted that in Ground No.4 (f), the Assessee has challenged the non-inclusion of Melstar Information Technologies Ltd. in the list of comparable companies. We find no such ground either in the original grounds of appeal or the revised grounds of appeal. Hence, the arguments for inclusion of this company in the list of comparable companies are not considered.

32. The TPO/AO is directed to compute the ALP on the basis of directions given above and if the Assessee is found eligible for the benefit of tolerance limit as per the second proviso to Sec.92CA(2) of the Act, allow the said benefit and compute ALP. The TPO/AO will afford opportunity of being heard to the Assessee, on issues that have been remanded to him.

33. In the result, IT(TP) A.No.540/Bang/2013 is partly allowed.

IT(TP)A Nos.540/B/13 (Assessee's appeal for AY 2008-09) and 616/B/13 (Revenue's appeal for AY 2008-09)

34. As far as the appeals of the Revenue and the Assessee for AY 2008- 09 is concerned, the only issue arising for consideration in the cross- appeals pertains to the addition of Rs.45,37,857/- made by the TPO on account of determination of ALP of an international transaction of rendering of SWD services by the Assessee to its AE. During the previous year 2007- 08 relevant to the AY 2008-09, software development (technical support) and marketing support services were the only services rendered by the Assessee to its AEs. The TP issue in the present cross-appeals pertains only to the software' development services provided by the Assessee as the marketing support services provided by it were held to be at arm's length by the TPO. As regards the international transaction of provision of software development services to its AEs, an adjustment of Rs.45,37,857/- was made by the TPO. Subsequently, the Assessing Officer ('AO' for short) passed the assessment order dated 23.01.2012 in which the said TP adjustment was incorporated. Aggrieved, the Assessee filed an appeal before the CIT(A), which came to be partly allowed vide the impugned order dated 21.02.2013. To the extent its appeal was not allowed by the CIT(A), the Assessee has filed the above appeal before this Tribunal. So also, to the extent the CIT(A) allowed the Assessee's appeal, the Revenue has filed the above appeal before this Tribunal.

35. As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of Rs.4,48,08,288/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction the Assessee filed a Transfer Pricing study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The profit level indicator (PLI) chosen for the purpose of comparison of profit margin of comparable companies was operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was Rs.4,48,08,288. The Operating cost of the Assessee was Rs.4,07,34,807/-. The operating profit was thus Rs.40,73,481 (Rs.4,48,08,288 - Rs.4,07,34,807). OP/OC was 10%. The Assessee in its TP Study had chosen 17 companies as comparable companies, after applying the following filters:—

Filters applied by the Assessee in its TP study:

The arithmetic mean of the profit margin of the 17 companies so selected by the Assessee was 13.64%. Since the Assessee's profit margin was 10%, the Assessee claimed that the price charged in the international transaction was at Arm's Length and therefore no addition by way of adjustment to ALP should be made.

36. The Assessing Officer (AO) referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is required by the provisions of Sec.92CA of the Act. Out of the above 17 comparables, the TPO accepted 5 companies as comparable viz., LGS Ltd., Persistent Systems Pvt. Ltd., Quintegra Solutions Ltd., RS Software(India) Ltd., R Systems International Ltd. and rejected the other 12 comparable companies chosen by the Assessee in its TP study. The TPO applied the following filters in choosing comparable companies, viz.,

37. The TPO selected the following companies as comparable companies and determined ALP as follows:

Comparables selected by TPO and their arithmetic mean:

Computation of arm's length price by TPO and the adjustment made:

38. The AO added the shortfall in price received from the AE to the total income of the Assessee u/s.92 of the Act. Aggrieved by the aforesaid addition, the Assessee preferred appeal before CIT(A). Briefly, the CIT(A) held as follows:

(i) Turnover and abnormally high profits filter:

(ii) Different year ending filter:

The CIT(A) accepted the contention of the Assessee and rejected application of the filter, but the issue is academic given that no companies were actually rejected on application of the filter.

(iii) Functionality Filter:

The CIT(A) accepted the contention of the Assessee that Avani Cincom Technologies Ltd. and Kals Information Systems Ltd. were functionally different to the Assessee and thus directed their exclusion. However, its contention that e-Zest Solutions Ltd. was functionally dissimilar to it was rejected by the CIT(A).

(iv) Foreign exchange gain / loss:

The CIT(A) also held that the margins of the remaining comparables and that of the Assessee would need to be recomputed by the AO after excluding / including foreign exchange loss / gain for the relevant year, as the case may be, on the basis that such gains or losses are operating in nature.

(v) Working capital adjustment:

The CIT(A) directed the AO to provide for an adjustment to the margins of the remaining companies on account of working capital differences between that of the Assessee and the companies, as had been done by the TPO.

39. The following list will show the list of comparable companies that remain after the order of the CIT(A) and their profit margins after inclusion of foreign exchange loss or gain, as the case may be:

40. Briefly, the grounds of appeal in the Revenue's appeal are:

41. The grounds being pressed in the Assessee's appeal are as follows [Ground Nos.4 (a) and (b)]:

IT(TP) A.No.617/Bang/2013 Revenue's appeal for AY 2008-09

42. As far as Gr.No.2 raised by the Revenue in its appeal is concerned, the issue is whether turnover of comparable company should be relevant for considering comparability of companies. We have already held while deciding similar issue in the earlier part of this order while deciding similar grounds of appeal in revenue's appeal for AY 2008-09 wherein we have held that the CIT(A) rightly held that the turnover of comparable companies ought to be within a range of Rs. 1 crore to Rs. 200 crores, following this Hon'ble Tribunal's jurisdictional Bench decision in the case of Genisys Integrating Systems India (P) Ltd. (supra), apart from other decisions in Sony India P. Ltd. (supra), E-gain Communication (P.) Ltd. v. ITO [2009] 118 ITD 243 (Pune) and Deloitte Consulting India (P.) Ltd. v. Dy. CIT [2013] 36 taxmann.com 68/144 ITD 451 (Hyd. - Trib.) . For the reasons stated therein, we find no grounds to interfere with the order of the CIT(A) and consequently dismiss Gr.No.2 raised by the Revenue. It was the submission of the learned counsel for the Assessee that out of the companies excluded by applying the filter of turnover, four companies whose turnover is above Rs.200 crores viz., Infosys Ltd., Persistent Systems Ltd., Tata Elxsi Limited, and Wipro Limited have been held by this Hon'ble Tribunal to be functionally dissimilar to captive software development service providers such as the Assessee for the very same assessment year. This aspect will be considered while deciding the relevant ground of appeal of the Assessee.

43. As far as Gr.No.3 in the appeal by the revenue is concerned, the Revenue is challenging the CIT(A)'s action in excluding Celestial Biolabs Ltd. ('Celestial' for short) on account of its abnormal profit margin in FY 2007-08. At the outset, we notice that Celestial has been excluded on the grounds of functional comparability by the Tribunal Bangalore Bench for AY 2008-09 in the case of Sony India P. Ltd. v. Commissioner Of Income-Tax [2016] 67 taxmann.com 159 (Bang-Trib) . The tribunal held that this company was not functionally comparable as the company was into bio-informatics software product/services and the segmental break up was not provided. Since this company is found to be functionally not comparable to the Assessee, we hold that the CIT(A) was justified in excluding this company. Accordingly, this ground in the Revenue's appeal is dismissed.

44. As far as Gr.No.4 in revenue's appeal is concerned, we find that no company was directed to be included as a result of rejection of the different financial year ending filter, therefore this ground in the Revenue's appeal becomes academic and is therefore dismissed as such. As far as Gr.No.5 in Revenue's appeal is concerned, the grievance of the revenue is regarding order of the CIT(A) holding that Avani Cincom Technologies and Kals information Systems Ltd. should be excluded from the list of comparable companies on the ground that these two companies are functionally dissimilar to the functions performed by the Assessee. We find that this Tribunal in the case of Telelogic India Pvt Ltd. (supra) for AY 2008-09 at paras 10 and 11 at pages 9 - 21 (pages 9-11 and 13-14 thereof respectively)] has excluded these two companies on the ground of functional comparability. Therefore, we find no grounds to interfere with the decision of the CIT(A) in this regard. Thus Gr.No.5 raised by the revenue is dismissed.

45. As far as Gr.No.9 raised by the Revenue in its appeal is concerned, the issue is with regard to correctness of the decision of the CIT(A) in holding that margins of the remaining comparables after giving effect to the directions of the CIT(A) should be computed by the TPO/AO after including foreign exchange loss / gain for the relevant year, as the case may be, since such gains or losses are operating in nature. On this aspect, we find that the CIT(A) has followed decisions of the jurisdictional Bench of this Hon'ble Tribunal in the cases of SAP Labs India (Pvt.) Ltd. (supra) and Trilogy E-Business Software India (P.) Ltd. (supra), which decisions have subsequently been consistently followed by this Hon'ble Tribunal. We therefore hold that there is no error in the order of the CIT(A) and therefore, ground No.9 in the Revenue's appeal is rejected.

46. As far as Gr.No.10 raised by the Revenue is concerned, the revenue has contended that the CIT(A) has erred in directing the AO to provide necessary working capital adjustments to the final eight comparable companies. In fact we find that there is no such grievance projected by the Assessee in the grounds of appeal raised before CIT(A), because the AO/TPO had given working capital adjustment in arriving at the profit margins of comparable companies for the purpose of arriving at the arithmetic mean of profit margins of comparable companies. We are therefore of the view that Gr.No.10 raised by the Revenue does not arise out of the order of the CIT(A). Even otherwise, Rule 10B(3) of the Income-tax Rules, 1962, supports the said action of the TPO in granting a working capital adjustment. In the following decisions rendered by the Bangalore Bench of ITAT, viz., TNT India (P.) Ltd. (supra) (para 13), Bearing Point Business Consulting (P.) Ltd. (supra) (para 5.4) and Apigee Technologies (India) (P.) Ltd. (supra) (paras 17 to 19) it has been held that adjustment towards working capital differences between the Assessee and the comparables should be considered and appropriate adjustment granted in arriving at the profit margins of comparable companies for the purpose of comparison. Consequently, Ground No.10 raised in the Revenue's appeal is dismissed.

47. In the result, Revenue's appeal being IT(TP) A.No.617/Bang/2013 for AY 2008-09 is dismissed.

IT(TP) A.No.541/Bang/2013 Assessee's appeal for AY 2008-09:

48. In Ground No.4 (a) and (b) the Assessee has sought exclusion of the following four companies viz., Infosys Ltd., Persistent Systems Ltd., Tata Elxsi Limited, and Wipro Limited, on the ground that apart their high turnovers, they are also functionally not comparable with the Assessee which is a SWD service provider. The Assessee's submissions in support of its contention that these four companies ought to remain excluded as they are functionally dissimilar to the Assessee. Reliance is based on the decision of Bangalore Bench ITAT in the case of Telelogic India Pvt Ltd. (supra) wherein at paras 10 and 11 at pages 9 - 21 (pages 14-15, 18-19, 15-16, and 15 thereof respectively) these four companies were excluded on the ground of functional dissimilarity. We are of the view that the aforesaid decision of the Tribunal rendered for AY 2008-09 in the case of a SWD service provider such as the Assessee supports the plea of the Assessee. Therefore these four companies are directed to be excluded from the list of comparable companies on the ground of functional dissimilarity also. As far as exclusion of Celestial Biolabs Ltd. is concerned we have already held while deciding the connected ground of appeal of the revenue that this company has to be excluded on the ground of functional dissimilarity. We reiterate that this company should be excluded from the comparable companies on the said ground. As far as exclusion of e-Zest Solutions Limited, from the list of comparable companies is concerned, the plea of the Assessee is that it is not functionally comparable as the said company is engaged in the business of rendering product engineering and development services, IT services and high end technical services, which come under the category of KPO services. Thus it is not comparable to the Assessee. In this regard, we find that the Bangalore ITAT in the case of Telelogic India Pvt Ltd. (supra) at paras 10 and 11 at pages 9 - 21 (pages 16-17 thereof) has upheld similar plea of an Assessee engaged in providing SWD service such as the Assessee. We therefore hold that this company should be excluded from the list of comparable companies.

49. The TPO/AO is directed to compute the ALP on the basis of directions given above and if the Assessee is found eligible for the benefit of tolerance limit as per the second proviso to Sec.92CA(2) of the Act, allow the said benefit and compute ALP.

50. In the result, IT(TP)A No. 540/Bang/2013 and IT(TP)A No. 616/Bang/2013 being appeals by the Assessee and Revenue for AY 2005-06 are partly allowed; IT(TP)A No.541/Bang/2013 being appeal by the Assessee for AY 2008-09 is partly allowed; and IT(TP)A No.617/Bang/2013 being appeal by the Revenue for AY 2008-09 is dismissed.

SUNIL