This appeal of the revenue and the cross objection of the assessee are directed against the order of CIT(A)-IV dated 14-03-2013 for the assessment year 2008-09.

2. The revenue has raised the following grounds:

1. The order of the learned CIT(A) is opposed to law and facts of the case.

2. On the facts and in the circumstances of the case the learned CIT(A) erred in ITA No.881 & C.O No.156/Bang/2013 Page 2 of 16 law in directing the AO to exclude the reimbursement of expenses incurred in foreign currency both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 1OA without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub-clause (4) of Explanation 2 below Sub-section (8) of Section 1OA and the total turnover has not been defined in this Section.

3. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that MIs Celestial Biolabs Ltd. in Software development segment; MIs Aditya Birla Minacs Worldwide Ltd; MIs Coral hubs Ltd., MIs Eclerx Services Ltd., MIs Jindal Intellicom Pvt Ltd., MIs Moldtek Technologies Ltd and MIs Allsec Technologies Ltd in ITES segment; MIs Priya International Ltd (seg) and ICC International Ltd (seg) in Marketing support services segment because of abnormal profits and losses margin, without giving reason how functions discharged, assets deployed and risks assumed on such companies were different from assessee company.

4. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that the TPO was not justified in applying the employee cost filter and directed to include MIs Indus Networks Ltd which was excluded in the software development services segment by using this filter.

5. On the facts and circumstances of the case the learned CIT(A) has erred in objecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend.

6. On the facts and in the circumstances of the case the learned CIT(A) failed to appreciate that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party.

7. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that M/s A vani Cimcon Technologies Ltd. cannot be taken as a comparable as the segmental details are not available.

8. On the facts and in the circumstances of the case the learned CIT(A) has erred in excluding M/s Celestial Biolabs Ltd. from the final set of comparables of Software segment and Engineering R&D segment.

9. On the facts and in the circumstances of the case the learned CIT(A) erred ITA No.881 & C.O No.156/Bang/2013 Page 3 of 16 in holding that M/s Kals Information Systems Ltd., cannot be taken as a comparable as the company carries inventories.

10. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that M/s Accentia Tech. Ltd had extraordinary circumstances and cannot be taken as a comparable.

11. On the facts and circumstances of the case learned CIT(A) has erred in holding that M/s Genesys International Corpn. Ltd., being functionally different cannot be taken as comparable.

12. For these and other grounds that may be urged at the time of hearing, it is prayed that the orders of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the AO may be restored.

13. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above

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3. The grounds raised by the assessee in its C.O are as under; Transfer Pricing

1.That the ld. CIT(A) erred in upholding the rejection of the respondents TP documentation on the basis that the data used in the computation of the arms length price was not reliable.

2. That the ld.CIT(A) erred in upholding the ld. TRP approach of using data at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arms length price, ignoring the fact that this data was not available to the respondent at the time of complying with TP documentation requirements.

3. That the ld. CIT(AQ) erred in upholding the ld. TPOs approach of disregarding application of multiple year data/prior year data as used by the respondent in the TP documentation and holding that current year (I.e. FY 2007-08) data for companies should be used for comparability.

4. That the ld. CIT(A) erred in upholding the ld. TPOs approach of collecting selective information of the companies by exercising powers granted to him under section 133(6) of the Act that was not available to the respondent in the public domain and relying on the same for comparability purposes.

5. That the ld. CIT(A) erred in upholding the TPOs approach of ignoring the limited risk nature of the services provided by the respondent and in not providing an appropriate adjustment towards risk differential, even when the full-fledged entrepreneurial companies are selected as comparables. 6.That the ld. CIT(A) erred in upholding the learned TPOs approach of using the related party transactions (RPT) filter greater than 25% for exclusion of comparable instead of RPT filter >15% filter as applied y the respondent.

7. That the learned CIT(A) erred in upholding the TPOs approach of using the export sales >25% of revenues filter and the onsite revenue >75% filter for the ITA No.881 & C.O No.156/Bang/2013 Page 4 of 16 exclusion of comparables.

8. Without prejudice, the learned CIT(A) erred in not rejecting companies which are not functionally comparable to the respondent in respect of its SWD segment and hence cannot be considered as comparables.

9. Without prejudice, the learned CIT(A) erred in not rejecting companies which are not functionally comparable to the respondent in respect of its ITeS segment and hence cannot be considered as comparables.

10. Without prejudice, the learned CIT(A) erred in not rejecting companies which are not functionally comparable to the respondent in respect of its MSS segment and hence cannot be considered as comparables.

11. That the respondent craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this appeal

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4. At the very outset, it was submitted by the ld. AR of the assessee that C.O of the assessee company is not pressed and accordingly, the same is dismissed as not pressed.

5. Regarding ground no.,1 of the revenues appeal, it was agreed by both sides that this ground is general in nature and no separate adjudication is called for.

6. Regarding ground no.2 of the appeal of the revenue also, both sides agreed that this issue is covered in favour of the assessee and against the revenue by the judgment of Honble Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd., as reported in 349 ITR 98 .

7. We have considered the rival submissions. We find that it was held by the Honble Karnataka High Court in this case that if an amount is reduced from the export turnover, the same amount has to be reduced from the total turnover also because the total turnover is nothing but sum total of export turnover and domestic turnover. Respectfully following this judgment, we ITA No.881 & C.O No.156/Bang/2013 Page 5 of 16 decline to interfere with the order of the ld. CIT(A) on this issue. Accordingly, ground no.2 of the revenue is rejected.

8. Regarding ground no.3 of the revenues appeal, ld. DR of the revenue placed reliance on the judgment of the Honble Delhi High Court rendered in the case of M/s Chryscapital Investment Advisors (Ind.) Pvt. Ltd., Vs DCIT as reported in 376 ITR 183 . In particular, our attention was drawn to para-33 of this judgment.

9. The ld. AR of the assessee supported the order of the ld. CIT(A). He also submitted a chart regarding exclusion of various comparables including some comparables which are being objected to by the revenue as per ground no.2 of this appeal such as M/s Celestial Labs Ltd., on the basis of functional dissimilarity by way of placing reliance on various Tribunal orders.

10. We have considered the rival submissions. First of all, we feel it proper to re-produce the relevant paras from the order of the ld. CIT(A) as per which, he has decided the issue regarding application of abnormal profits and losses filter. This issue has been decided by the ld. CIT(A) as per para -100 & 101 of his order and the same are reproduced hereunder;

100. It was argued that the TPO had considered certain comparable with abnormal profits and negative margins. The Delhi Bench of the Honble ITAT had in the case of Sony India (P)Ltd., v DCIT(2008) 114 ITD 448(Del.) upheld the objection of assessee on inclusion of a comparable when distinctive differences like size and turnover materially affected performance or prices of products. It had been held in E-Gain Communication Pvt. Ltd., (2008) TIOL-282-ITAT-Pune) that there was no justification for considering oversized companies and the ITA No.881 & C.O No.156/Bang/2013 Page 6 of 16 Commissioner (Appeals) was in error in considering turnover as the only relevant factor needed to be considered for a proper analysis.

101. I have considered the appellants contention and am inclined to agree. Following the decisions cited above, I direct the AO to apply to exclude from the final set of comparables the following companies that had abnormally high profits or had incurred losses. This ground of appeal is partly allowed

. Sl.No. Comparable company Turnover (Rs.Crore) OP/TC(%) I. Software Development Services

1. Celestial Labs Ltd., 20.21 87.91 II. IT Enabled Services 1 Aditya Birla Minacs Worldwide Ltd 176.72 -4.00 2 Coral Hubs Ltd., 38.08 50.68 3 Eclerx Services Ltd., 116.98 58.80 4 Jindal Intellicom Pvt. Ltd., 19.55 - 10.29 5 Mold-Tek Technologies Ltd., 17.85 96.66 6 Allsec Technologies Ltd., 99.53 -13.29 III Marketing Support Services 1 Priya International Ltd (Seg.) 1.96 237.93 2 ICC International Ltd (Seg.) 5.06 195.91

11. From the above paras of the order of the ld. CITA), it is seen that he has considered two Tribunal decisions rendered in the case of Sony India Pvt. Ltd. v DCIT 114 ( ITD 448Del) and E-Gain Communication Pvt. Ltd., reported in (2008) TIOL-282-ITAT Pune. In the case of M/s Chryscapital Investment Advisors (Ind.) Pvt. Ltd., Vs DCIT(Supra), the Honble Delhi High Court has duly considered all the available judgments and thereafter held that merely for a peculiar feature such as ITA No.881 & C.O No.156/Bang/2013 Page 7 of 16 huge profit or huge turnover ipso-facto, does not lead to its exclusion. Hence, in our considered opinion, when judgment of a High Court is available, we have to follow that judgment as compared to various Tribunal orders. For the sake of ready reference, we re-produce para-33 of the judgment of the Honble Delhi High Court which reads as under; 33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile in respect of the activity in question can be viewed independently from other activities- cannot be subject to a per se standard of loss making company or an abnormal profit making concern or huge or mega turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company - otherwise conforming to the stipulations in Rule 10B (2) 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 TPO, 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. Hence, by respectfully following this judgment of the Honble Delhi High Court, we hold that the order of the ld. CIT(A) on his issue that certain companies should be excluded from the list of comparables merely on the basis of abnormal profits and losses is not sustainable. Although, the same company may be excluded if such exclusion is proper because of other reasons ITA No.881 & C.O No.156/Bang/2013 Page 8 of 16 such a functional dissimilarities etc. but we find that as per the order of the ld.CIT(A), the is no discussion about some of the comparable companies on the basis of other aspects such as functional dissimilarity etc., and in the absence of any finding of the ld. CIT(A) on these aspects, we do not consider it proper to examine and decide these aspects in the absence of any finding on these aspects. In our considered opinion, the matter should go back to the file of the ld. CIT(A) for his decision on these aspects. We hold accordingly and set aside the order of the ld.CIT(A) and restore back this issue to his file for fresh decision for exclusion of these companies which are objected to by the revenue in ground no.3 in the light of various arguments of the assessee on the basis of functional dissimilarities etc. The ld. CIT(A) should pass necessary order as per law and as per the above discussion after providing adequate opportunity of being heard to both sides.

12. Regarding ground no.4, ld. DR of the revenue supported the order of the AO/TPO whereas the ld. AR of the assessee submitted that he has no objection even if this company is included as a comparable. Accordingly, this issue is decided in favour of the revenue and against the assessee and ground no.4 of the revenue is allowed.

13. Regarding ground no.5, ld. DR of the revenue supported the order of the ld. AO/TPO whereas the ld. AR of the assessee supported the order of the ld.CIT(A). ITA No.881 & C.O No.156/Bang/2013 Page 9 of 16

14. We have considered the rival submissions. We find that this issue has been decided by the ld. CIT(A) as per para-89 & 90 of his order which are re-produced below for the sake of ready reference; 89. I have considered the appellants submissions on this aspect. The reason given by the TPO for applying the diminishing revenue and persistent losses filters is that the filters are designed to eliminate companies which are not in line with the trend of growth witnessed in the software industry. However, use of these filters depends on trends over a period of time and is contrary to the TPOs own stand that only current years data are required to be used.

90. Growth of the Indian software industry cannot be attributed solely to existing companies, but also to new companies being set up, which in turn depends upon the entry and exit barriers that characterise an industry. Moreover, revenue may not always be a true indicator of a companys performance, which may also depend on its own business cycle. 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. 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 efficiently.

15. From the above paras reproduced from the order of the ld.CIT(A), we find that he has given cogent reasoning for rejecting the diminishing revenue filter used by the TPO and therefore, on this issue, we find no ITA No.881 & C.O No.156/Bang/2013 Page 10 of 16 reason to interfere with the order of the ld. CIT(A). Accordingly, ground no.5 of the revenue is rejected.

16. Regarding ground no.6, ld. DR of the revenue supported the order of the ld. AO/TPO whereas the ld. AR of the assessee supported the order of the ld.CIT(A).

17. We have considered the rival submissions. We find that this issue was decided by the ld. CIT(A) as per para no.96 to 99 of his order which are reproduced below;

96.On consideration of the appellants contentions, I am unable to agree with the TPO that in a short time horizon of current years business, a mere change in financial year ending would make significant difference to companies that are functionally similar, operate in a similar business environment, and face the same business cycle. If the TPO had evidence that such a thing had happened in the case of a particular company, it was for him to point out what exact difference had the change of accounting year made to the financial results of that company and whether it would not be possible to restate or reconcile those financial results for a different accounting period without significant change in the net profit margin or any other parameters he considered relevant.

97. Since multinational companies operate in different geographical regions and different countries follow different accounting or financial years, functionally similar or even identical companies cannot be held to be incomparable only owing to differences in the date of ending of the financial ITA No.881 & C.O No.156/Bang/2013 Page 11 of 16 year. Most business enterprises operate on the going concern concept which is fundamental to present day accounting, but the period concept used in accounting is just an artificial means to reckon the operating results of business operations at a given point in time. Nothing would turn upon changing the end of accounting period from31st March to another date within a short span of time (say, six months). This view finds support from paragraph 32 of the OCED Draft Comparability Issues which states that while it is practical to make year by year comparisons, economic circumstances cannot be assumed to change overnight at the end of a tax year.

98. AS-21 issued by the ICAI on consolidation of accounts as well as section 212 of the Companies Act permit differences in the dates of financial year closure of companies within six-month time frame. Considering this, I am inclined to hold that where he accounting period of a comparable exceeds the financial year by not more than six months relative to the accounting year of the appellant, it should be considered as a comparable, so long as these companies, despite having a different financial year ending, are operating during the same period of time and are also facing the same business cycles and market and economic conditions as the appellant does.

99. In the absence of evidence that there has been a significant impact on margins due to different reporting or accounting periods, it would be incorrect to disregard companies by using this filter. Considering these aspects, I uphold the appellants arguments on this issue and disapprove of this filter

. ITA No.881 & C.O No.156/Bang/2013 Page 12 of 16

18. From the above paras from the order of the ld.CIT(A), we find that as per the ld. CIT(A), even if the accounting year of the comparable is not financial year, but the accounting year of the comparable company is closing within six months time frame then such company can be considered as comparable. On this aspect, we are of the considered opinion that if the assessee or TPO wants that such company should be considered as a comparable then the assessee/TPO should be able to provide the data of the same company for the same financial year by adding the data of two years and then making exclusion of preceding period data and subsequent period data and hence, we feel it proper to set aside this matter back to the file of ld. CIT(A) for a fresh decision and if the assessee can furnish data of such comparable for the relevant financial year then such company may be considered as a comparable and not without that. Ld. CIT(A) should pass necessary order as per law after providing reasonable opportunity of being heard to both sides. Ground no.6 is allowed for statistical purposes.

19. Regarding ground no.7of the revenues appeal, ld. DR of the revenue placed reliance on the order of the AO/TPO whereas the ld. AR of the assessee supported the order of the ld. CIT(A). Regarding company M/s Avani Cincom Technologies Ltd., he placed reliance on the Tribunal order rendered in the case of 3DPLM Software Solutions Pvt. Ltd., in IT(TP)A No.1303/Bang/2012 (AY: 2008-09). Copy available on pages 12 to 17 of case law compendium.

20. Regarding M/s Celestial Biolabs Ltd., objection raised as per ground no.8, it was submitted by the ld. AR of the assessee that exclusion of this ITA No.881 & C.O No.156/Bang/2013 Page 13 of 16 company is justified on account of functional dissimilarity and in this regard, reliance was placed on the same Tribunal order rendered in the case of 3DPLM Software Solutions Pvt. Ltd.(Supra).

21. In respect of M/s Kals Information Systems Ltd., exclusion of which is being disputed by the revenue as per ground no.9, Learned AR of the assessee placed reliance on the same Tribunal order rendered in the case of 3DPLM Software Solutions Pvt. Ltd.(Supra).

22. Regarding M/s Accentia Technologies Ltd., for which objection is raised as per ground no.10, Learned AR of the assessee placed reliance on the Tribunal order rendered in the case of IGS Imaging Service (I) Pvt. Ltd., Vs DCIT in IT(TP)A No.470/Bang/2013 (AY: 2008-09), copy available on page - 160 of the case law compendium.

23. We have considered rival submissions. Regarding ground no.7 to 9 in respect of M/s Avani Cincom Technologies Ltd., M/s Celestial Biolabs Ltd., and M/s Kals Information Systems Ltd., we find that in the case of 3DPLM Software Solutions Pvt. Ltd(Supra), it was held by the Tribunal that these companies are functionally dissimilar. In that case also, the assessee company i.e. 3DPLM Software Solutions Pvt. Ltd(Supra) was engaged in providing software development services and other related services to its group companies as in the present case. Therefore, respectfully following this Tribunal order, we decline to interfere with the order of the ld.CIT(A). Accordingly, ground nos.7 to 9 raised by the revenue are rejected. ITA No.881 & C.O No.156/Bang/2013 Page 14 of 16

24. Regarding ground no.10 we find that it was held by the Tribunal in the case of IGS Imaging Services (I) Pvt. Ltd.,(Supra) that this company cannot be considered as a comparable and it was so held by following another Tribunal order rendered in the case of M/s Symphony Marketing Solutions India Pvt. Ltd., IT(TP)A No.1316(Bang)/2012 dated 14-08-2013) The relevant portion of that Tribunal order was reproduced by the Tribunal in the order in the case of IGS Imaging Services (I) Pvt. Ltd., (Supra) and there in, it has been noted by the Tribunal that there was merger and demerger in FY: 2007-08 and on this basis, the Tribunal held that because of extraordinary events like merger and demerger, it will have an effect on the profitability of this company in the financial year in which such event takes place and therefore, in that year, this company cannot be considered as a comparable. In the present case also, assessment year involved is AY: 2008-09 for which relevant AY: is FY: 2007-08 and therefore, respectfully following this Tribunal order, we decline to interfere with the order of ld.CIT(A) on this issue. Accordingly, ground no. 10 of the revenue is rejected.

25. Regarding ground no.11, ld. DR of the revenue supported the order of the AO/TPO whereas the ld. AR of the assessee submitted that the assessee company held to be functionally dissimilar as per the same Tribunal order rendered in the case of IGS Imaging Services (I) Pvt. Ltd., (Supra). Copy available on pages 163 to 165 of case law compendium.

26. We have considered the rival submissions. We find that in the case of IGS Imaging (I) Pvt. Ltd(Supra), the Tribunal has followed another Tribunal ITA No.881 & C.O No.156/Bang/2013 Page 15 of 16 order rendered in the case of Symphony Marketing Solutions India Pvt. Ltd.,(Supra) and as per the relevant portion of that Tribunal order rendered in the case of Symphony Marketing Solutions India Pvt. Ltd.,(Supra) reproduced in the Tribunal order rendered in the case of IGS Imaging (I) Pvt. Ltd., (Supra), it was held by the Tribunal that this company is providing services of KPO and therefore, this cannot be considered as comparable in the case of a company engaged in providing BPO services.

27. The ld. DR of the revenue could not point out as to why this Tribunal order is not applicable in the present case and therefore, respectfully following this Tribunal order, we decline to interfere with the order of the ld.CIT(A) on this issue. Accordingly, ground no.11 of the revenue is also rejected.

28. In the result, the appeal of the revenue is partly allowed for statistical purposes.

29. In the combined result, the appeal of the revenue is partly allowed for statistical purposes whereas the cross objection of the assessee is dismissed. Order pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (N.V.VASUDEVAN) (A.K.GARODIA) JUDICIAL MEMER ACCOUNTANT MEMBER Bangalore: D a t e d : 22-07-2016 am ITA No.881 & C.O No.156/Bang/2013 Page 16 of 16 Copy to : 1 Appellant 2 Respondent

3. CIT(A), Bangalore

4. CIT, Bangalore

5. DR, ITAT, Bangalore

6. Guard File By order AR, ITAT, Bangalore

1. Date of Dictation ..

2. Date on which the typed draft is placed before the dictating Member .

3. Date on which the approved draft comes to the Sr. P. S. .. 4 Date on which the order is placed before the dictating Member for pronouncement ..

5. Date on which the order comes back to the Sr. P.S. ..

6. Date of uploading the order on website ..

7. If not uploaded, furnish the reason for doing so.

8. Date on which the file goes to the Bench Clerk ..

9. Date on which order does for Xerox & endorsement .

10. Date on which the file goes to the Head Clerk. 11 The date on which the file goes to the Assistant Registrar for signature on the order. 12 The date on which the file goes to the dispatch section for dispatch of the Tribunal order 13 Date of dispatch of order