SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER 
AND R.K. PANDA, ACCOUNTANT MEMBER

ORDER

R.K. Panda, Accountant Member - This appeal filed by the assessee is directed against the order passed u/s.143(3) r.w.s. 144C(13) and 115WE(3) by the DCIT, Circle-11(1), Pune for the Assessment Year 2007-08.

2. Ground of appeal No.1 by the assessee reads as under :
"1. The Ld. DRP erred in confirming the disallowance of deduction u/s.35D of Rs.39,99,272/-."
2.1 At the time of hearing, the Ld. Counsel for the assessee did not press this ground for which the Ld. Departmental Representative has no objection. Accordingly, the same is dismissed as 'not pressed'.

3. Ground of appeal No.2 by the assessee reads as under :
"2. The Ld. DRP erred in confirming the disallowance of Rs.33,174/- on the ground that assessee must have incurred indirect expenditure for increasing the share capital and therefore, the same was to be disallowed."

3.1 Facts of the case, in brief, are that during the course of assessment proceedings the Assessing Officer observed that assessee has increased its issued, subscribed and paid up share capital by making direct expenses of Rs.33,17,360/- on account of stamp duty and registration charges. He observed that in the computation of income the assessee company claimed deduction of Rs.6,63,472/- u/s.35D of the I.T. Act. by amortizing the said expenses over a period of 5 years. According to the Assessing Officer the assessee must have incurred further indirect expenses for increasing the share capital. Therefore, the Assessing Officer made adhoc disallowance of Rs.33,174/- treating the said expenses as capital expenditure. The assessee approached the DRP but without any success. The Assessing Officer accordingly made disallowance of Rs.33,174/-.

3.2 Aggrieved with such order of the Assessing Officer the assessee is in appeal before us.
4. The Ld. Counsel for the assessee strongly challenged the order of the Assessing Officer. He submitted that the assessee has incurred expenditure of Rs.33,17,360/- on stamp duty and registration charges. There is no evidence that the assessee has incurred any further expenditure over and above the amount debited in the books of account. He submitted that in absence of any concrete evidence no addition can be made on presumptive basis.

5. The Ld. Departmental Representative on the other hand heavily relied on the order of the Assessing Officer.

6. After hearing both the sides, we find the disallowance was made by the Assessing Officer purely on guess work and on adhoc basis without any iota of evidence that the assessee has incurred further expenditure over and above what is recorded in the books. It is the settled proposition of law that presumptions and surmises however strong may be cannot be the basis for addition. Since in the instant case, there is no direct or indirect evidence brought on record by the Assessing Officer that the assessee has incurred further indirect expenses for the purpose of increasing the share capital of the company, therefore, the addition made by the Assessing Officer deserves to be deleted. We accordingly direct the Assessing Officer to delete the same. Ground of appeal No.2 by the assessee is accordingly allowed.
7. Ground of appeal No.3 by the assessee reads as under :

"3. The Ld. DRP erred in confirming the action of the Assessing Officer by holding that the amount incurred of Rs.33,17,360/- for increasing the share capital was disallowable u/s.14A of the Act."
7.1 As mentioned in the preceding paragraph the assessee has incurred expenditure of Rs.33,17,360/- during the year under consideration for increasing the share capital. The assessee claimed the above amount as eligible for deduction u/s.35D and accordingly the same was claimed as deduction in the return of income. According to the Assessing Officer, the above direct expenditure of Rs.33,17,360/- deserves disallowance u/s.14A of the I.T. Act since the increase in share capital was for making the investment in the subsidiary companies. However, since the assessee in the computation of income has claimed deduction of Rs.6,63,472/-u/s.35D of the I.T. Act by amortizing the said expenses over a period of 5 years the Assessing Officer disallowed the said amount of Rs.6,63,472/- . Since he disallowed the amount of Rs.6,63,472/-rejecting the claim of deduction u/s.35D of the I.T. Act, the Assessing Officer did not make further disallowance u/s.14A. The assessee approached the DRP but without any success. The Assessing Officer accordingly made addition of Rs.33,17,360/- to the total income of the assessee.

7.2 Aggrieved with such order of the Assessing Officer the assessee is in appeal before us.
8. The Ld. Counsel for the assessee submitted that the addition made by the Assessing Officer is devoid of any merit. According to him, the share capital was increased by the assessee company which is available for various purposes and it is not a case that the capital is increased only for making the investment in the subsidiary company. He submitted that the utilisation of funds raised on account of increase in the share capital is not to be considered for making the disallowance u/s.14A. Referring to page 98 of the paper book he submitted that the assessee has already disallowed itself an amount of Rs.39,92,272/- and has not claimed any expenditure. Referring to page 29 of the paper book he submitted that the auditors in clause 15 of the Tax Audit Report have mentioned that the deduction is allowable u/s.35D at Rs.39,99,272/-and the assessee has debited an amount of Rs.33,17,360/-. He submitted that since the assessee in its grounds of appeal has not pressed for the addition of Rs.39,99,272/-, therefore, no further disallowance u/s.14A is called for.

9. The Ld. Departmental Representative on the other hand supported the order of the Assessing Officer.
10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer/TPO and the DRP and the paper book filed on behalf of the assessee. From the various details furnished by the assessee we find the disallowance of Rs.39,99,272/- claimed as deduction u/s.35D was disallowed by the Assessing Officer and the assessee did not press the grounds of appeal No.1 in which it has challenged the order of the Assessing Officer in disallowing the claim of deduction u/s.35D. Once the same is disallowed, there cannot be any further addition u/s.14A since it amounts to double disallowance. We accordingly direct the Assessing Officer to delete the addition of Rs.33,17,360/-. Ground of appeal No.3 raised by the assessee is accordingly allowed.

11. Grounds of appeal No.4 and 4.1 by the assessee read as under:
"4. The Ld. DRP erred in restricting the claim of deduction u/s.10A to Rs.6,38,86,434/- as against the claim of Rs.9,22,90,403/-made by the assessee by apportioning the various expenses between the eligible and non-eligible undertaking on the basis of turnover of each of the units.
4.1 The Ld. DRP erred in holding that the deduction u/s.10A was not allowable in respect of the disallowance made u/s.40(a)(ia) and 43B."

11.1 Facts of the case, in brief, are that during the course of assessment proceedings the Assessing Officer observed that the assessee has claimed deduction of Rs.9,22,90,403/- u/s.10A of the I.T. Act. From the various details furnished by the assessee the Assessing Officer noted that the assessee company has 2 units, i.e. one eligible unit u/s.10A and the other one, a non-eligible unit. He observed that the assessee company has claimed loss before taxes of Rs.33,14,334/- against total turnover of Rs.6,55,41,422/- in respect of taxable unit. At the same time, the assessee has claimed positive income of Rs.8,96,71,809/- against total turnover of Rs.79,82,41,740/- in respect of exempted unit. Thus, according to the Assessing Officer there is substantial abnormality in the profit before tax in respect of taxable unit if the same is compared with respect to the exempted unit. On verification of the various details furnished by the assessee, the Assessing Officer noted that both the units, i.e. STPI and non STPI (exempt and taxable) are rendering their total IT and IT enabled services to their parent/holding company. He noted that no separate books of accounts are maintained for the said two units. Therefore, in absence of the same, he was of the opinion that the book results shown by the assessee are not fully verifiable. He noted that the auditors while certifying the eligibility of deduction of Rs.9,22,90,403/- u/s.10A have given the following note :

"4. The indirect costs have been allocated to the eligible STPI unit based on the assumptions made and determined appropriate by the management and we have relied upon the same.
5. In determining the profit of the undertaking, operating and other overhead costs have been allocated based on the assumptions made as determined appropriate by the management of the company and the auditors have not ascertained their propriety".
11.2 He, therefore, was of the opinion that the correctness/reasonableness of the expenses allocated by the assessee company between the taxable/non-taxable unit is not at all verifiable for the following reasons :

"(a)		The assessee has not adopted any uniform reasonable method to allocate the expenses between the two units. It is claimed that the basis of apportionment for the salary is actual and for the other operating expenditure based on head count or proportion of revenue. The expenses allocated against the taxable unit is as high as 100% in case of testing charges, which is not reasonable with respect to method followed by the assessee.
(b)		The assessee did not maintain separate set of books of accounts for the said units.
(c)		The Auditor of the assessee company has certified the claim of deduction u/s.10A on the basis of assumption made and determined appropriate by the management of the company without ascertaining its propriety. As such, the certificate of the Auditor cannot be relied upon to allow claim of the assessee
(d)		All services of taxable/non-taxable units are consumed by single holding company (related party)."

11.3 In absence of specific separate details of expenses incurred on the 2 units the Assessing Officer, following the provisions of section 80IA(8) proceeded to compute such profits and gains on reasonable basis as provided in the proviso to the said section. He noted that certain disallowances u/s.40(a)(ia), 40A(7) and 43B were admitted by the assessee for violation of the respective provisions According to the Assessing Officer, the disallowance u/s.40(a)(ia), 40A(7) and 43B is not the actual earning but addition with intention to penalize the mistake of the assessee. There is no immunity given to any such undertaking which otherwise are eligible for deduction u/s.10A to disobey the statutory provisions of the Act. The Assessing Officer accordingly restricted the claim of deduction u/s.10A at Rs.6,38,86,434/- as against deduction of Rs.9,29,90,403/- claimed by the assessee by disallowing the following amounts :

Sr.No.	Nature of disallowance	Amount (Rs.)
1	Disallowance u/s.40(a)(ia)	1,56,99,911
2	Disallowance u/s.43B (Leave Encashment)	1,31,44,715
3	Disallowance u/s.43B (Service Tax)	69,813
	Total	2,89,14,439

The assessee challenged before the DRP but without any success. The Assessing Officer accordingly restricted the claim of deduction by disallowing Rs.2,89,14,439/- as above.

11.4 Aggrieved with such order of the Assessing Officer the assessee is in appeal before us.
12. The Ld. Counsel for the assessee referring to page 98 of the paper book submitted that the assessee has given complete details and has made addition to the total income u/s.40(a)(ia) and 43B. He submitted that because of the disallowances the business income of the assessee has gone up and the assessee has claimed higher deduction u/s.10A. Referring to the decision of the Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India (P.) Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 he submitted that the Hon'ble High Court in the said decision has held that increased income owing to disallowance has to be taken into account for the purpose of calculation of deduction u/s.10A. He submitted that the Assessing Officer has completely ignored the decision of the Hon'ble Bombay High Court cited (supra). He submitted that the assessee has maintained separate books of account. The assessee has apportioned the common expenses on the basis of number of employees whereas the Assessing Officer has allocated the expenses on the basis of turnover. In any case, in view of the decision of the jurisdictional High Court in the case of Gem Plus Jewellery India (P.) Ltd. (supra), the Assessing Officer is not justified in restricting the deduction u/s.10A on account of disallowance u/s.40(a)(ia) and 43B. He accordingly submitted that the claim of deduction u/s.10A by the assessee should be allowed.

13. The Ld. Departmental Representative on the other hand while supporting the order of the Assessing Officer submitted that the action of the Assessing Officer in restricting the claim of deduction u/s.10A to Rs.6.38 crores is justified since deduction u/s.10A is not available to disallowance u/s.40(a)(ia) and section 43B. For the above proposition, the Ld. Departmental Representative relied on the decisions of the Mumbai Bench of the Tribunal in the case of Tricom India Ltd. v. Asstt. CIT [2010] 36 SOT 302 andCG International (P.) Ltd. v. Asstt. CIT [2007] 13 SOT 280 (Mum.) and the decision of the Hon'ble Madras High Court in the case of CIT v. Menon Impex (P.) Ltd. [2003] 128 Taxmann 11. She submitted that in the above decisions it has been held that deduction is unavailable against the receipts which were not derived from the operation of the eligible business. She submitted that the Assessing Officer in the assessment order has discussed that the assessee has failed to provide a bifurcation of expenses between the eligible and ineligible business as separate books were not maintained for which he adopted a reasonable estimate. She accordingly submitted that the order of the Assessing Officer be upheld.

14. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the DRP and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only question to be decided in the impugned grounds is the allowability of deduction u/s/10A on the income due to disallowance u/s.40(a)(ia) and 43B. It is the case of the Assessing Officer that no deduction u/s.10A is allowable on the income increased due to disallowance u/s.40(a)(ia) and 43B. It is the case of the assessee that in view of the decision of the Hon'ble Bombay High Court in the case of Gem Plus Jewellery India (P.) Ltd. (supra), increased income owing to disallowance u/s.40(a)(ia) and 43B has to be taken into consideration for calculation of deduction u/s.10A.
14.1 The Hon'ble Bombay High Court while deciding an identical issue for computation of deduction u/s.10A where disallowance was made u/s.43B has observed as under :

"For the purposes of the appeal it is necessary to refer to the admitted position which is that the assessee had deposited both the employer's and the employees' contribution towards PF and ESIC, though beyond the due date including the grace period. The AO added these payments to the total income of the assessee and made an addition in the amount of Rs. 71.59 lacs. However, for the deduction under s. 10A, the addition made on account of the employees' contribution was ignored in calculating the profits eligible for deduction on the ground that these receipts were not generated out of the manufacturing activity of the assessee company.

By reason of the judgment of the Supreme Court in CIT v. Alom Extrusions Ltd. (2009) 227 CTR (SC) 417 : (2009) 32 (SC) DTR 49 : (2009) 319 ITR 306 (SC) the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the AO has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that the assessed income was enhanced due to the disallowance of the employer's as well as the employees' contribution towards PF/ESIC and the only question which is canvassed on behalf of the Revenue is whether on that basis the Tribunal was justified in directing the AO to grant the exemption under s. 10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the employer's and the employees' contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the AO to the income. All profits of the unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The disallowance of the PF/ESIC payments has been made because of the statutory provisions-s. 43B in the case of the employer's contribution and s. 36(v) r/w s. 2(24)(x) in the case of the employees' contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the AO is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under s. 10A the addition made on account of the disallowance of the PF/ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the AO must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee."
14.2 Respectfully following the decision of the jurisdictional High Court cited (supra), we hold that the Assessing Officer is not justified in restricting the deduction u/s.10A on account of disallowance u/s.40(a)(ia) and 43B. Grounds of appeal No.4 and 4.1 by the assessee are accordingly allowed.

15. Ground of appeal No.4.2 by the assessee reads as under :

"4.2 The Ld. DRP erred in holding that the assessee company was not entitled to claim deduction u/s.10A in respect of the other income of Rs.13,03,075/- without appreciating that the said income was derived from the business of industrial undertaking and hence, the deduction ought to have been allowed".

15.1 At the time of hearing, the Ld. Counsel for the assessee did not press this ground for which the Ld. Departmental Representative has no objection. Accordingly, ground of appeal No.4.2 is dismissed as 'not pressed'.
16. Grounds of appeal No. 5 to 5.6 by the assessee reads as under:
"5. The Ld. DRP erred in confirming the addition of Rs.10,29,90,870/- made u/s.92CA of the Act".
5.1 The learned DRP erred in making an adjustment of Rs.5,03,92,400/- u/s 92CA in respect of provision of software development services by the appellant company to its AE.
5.2 The learned DRP erred in making an adjustment of Rs.4,63,25,506/- u/s 92CA in respect of provision of design engineering & testing services by the appellant company to its AE.
5.3 The learned DRP erred in making an adjustment of Rs.62,72,964/- u/s 92CA in respect of provision of regional supply management Services by the appellant company to its AE.
5.4 Without prejudice to the above grounds, the learned DRP erred in not appreciating that the adjustment on account of working capital as well as marketing cost was required to be made for determining the ALP in respect of the International Transaction relating to provision of software development, design engineering & testing & regional supply management services.

5.5 Without prejudice to the above grounds, the assessee submits that the learned DRP erred in not making adjustments to the ALP to account for various differences on account of intangible, R & D, risk factors, etc.
5.6 The assessee submits that without prejudice to its contention that the addition made u/s 92CA is not warranted at all, it is submitted that the learned DRP ought to have granted the benefit of 5% to the assessee company as per the second proviso to section 92C(2)."

16.1 Facts of the case, in brief, are that for the impugned assessment year, the assessee company has provided three types of services to its AE, namely, (a) software development services, (b) design, engineering, testing and authoring services and (c) business support services, the details of which are given on page 2 of the TPO's order and which are as under:

Sr.No.	Nature of Transaction	Amount (Rs.)	Method
1	Provision of software development services	39,29,09,065/-	TNMM
2	Provision of design engineering, Testing and authoring services, development, Maintenance and testing of embedded system software services	43,48,75,003/-	TNMM
3	Provision of business support services	3,59,99,094/-	TNMM

16.2 The assessee company adopted TNMM method as the most appropriate method for determining the ALP of international transactions entered into by it and it was explained that all the above transactions were at ALP and thus, no adjustment u/s 92C was warranted.

16.3 However, the TPO did not accept the contention of the assessee. He accepted the TNMM method as the most appropriate method for determining the ALP. However, he rejected certain companies selected as comparable entities by the assessee and simultaneously introduced certain additional companies as comparable entities in respect of various segments. Accordingly, the TPO made the following adjustments u/s 92CA in respect of the various services rendered by the assessee to its AE -

Sr. No.	Nature of Services rendered to AEs	Total Addition u/s 92CA
1.	Software Development Services	5,03,92,400
2.	Design Engineering, Testing and Authoring Services	4,63,25,506
3.	Regional Management Supply Services / Business Support Services	62,72,964
	Total	10,29,90,870

Software Development Services Segment :

17. In this year, the assessee has provided software development services to Deere & Co. The software development services are mainly in the nature of computer programming, code development, integration, etc. The total turnover of software development services in this year was Rs.39,29,09,065/-. In the TP Study Report, the assessee had initially selected 28 companies as comparable entities for determining ALP of software services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 27 comparable entities on the basis of single year data. The list of comparable entities selected by the assessee is as under :

Sr. No.	Companies selected as comparable by the TPO	OM (%)
1	Akshay Software Technologies Ltd	6.20
2	Aztech Software & Technology Services	18.93
3	Four Soft Ltd	18.94
4	Gebbs Infotech Ltd	NA
5	Genysis International Corporation	12.89
6	Goldstone Technologies Ltd	20.31
7	Helios & Matheson Information Tech. Ltd .	40.60
8	Infosys Technologies Ltd	40.87
9	KPIT Cummins Infosystems Ltd	17.32
10	Lanco Global Systems Ltd	19.87
11	L & T Infotech Ltd	15.15
12	Marrs Software International Ltd	6.44
13	Melstar Information Technology Ltd	1.42
14	Mindtree Consulting Ltd	17.69
15	Orient Information Technologies Ltd	-25.12
16	Quintegra Solutions Ltd	15.49
17	R S Software India Ltd	13.09
18	SIP Technologies & Exports Ltd	10.12
19	Sasken Communication Technologies Ltd	21.92
20	Sasken Network Systems Ltd	NA
21	TVS Infotech Ltd	8.04
22	Transworld Infotech Ltd	32.88
23	Tyche Industries Ltd	26.77
24	VJIL Consulting Ltd	-44.35
25	VMF Soft Tech Ltd	18.39
26	Visualsoft Technologies Ltd	1.40
27	Zylog Systems Ltd	16.69
	Avg. Operating Margin	13.07

17.1 As per the said list, the Avg. Operating Margin [Operating Profit/ Operating Cost] of the comparable entities was worked out at 13.07% as against the Operating Margin of the assessee company of 9.37%. Accordingly, it was submitted that the Operating Margin of the assessee company was within the range of +/- 5% from the ALP determined on the basis of avg. Operating Margins of various companies and therefore, there was no reason to make any adjustment u/s 92C of the Act.

17.2 However, the TPO did not accept the contention of the assessee. Out of the 27 comparable companies selected by the assessee, the TPO rejected 16 companies and added 2 new companies as comparable entities, namely, Kals Information Systems Pvt. Ltd. and Compucom Software Ltd. Thus, he arrived at a final set of 13 companies as comparable entities in software development division. The list of final comparable entities as selected by the TPO is as under :

Sr. No.	Companies selected as comparable by the TPO	OM (%)
1	Akshay Software Technologies Ltd.	6.20
2	Aztec Software and Technology Services Ltd.	18.93
3	Helios & Matheson Information Technology Ltd.	40.60
4	Infosys Technologies Ltd.	40.87
5	Larsen & Tuobro Infotech Ltd.	15.15
6	Mindtree Consulting Ltd. (Seg)	17.69
7	R.S. Software (India) Ltd.	13.09
8	SIP Technologies and Exports Ltd.	10.12
9	Sasken Communication Technologies Ltd.	21.92
10	Transworld Infotech Ltd.	32.88
11	Kals Information Systems Ltd.	30.55
12	Compucom Software Ltd.	35.63
13	Goldstone Technologies Ltd.	20.31
	Avg. Operating Margin	23.38

17.3 Accordingly, the TPO computed the Avg. Operating Margin of comparable entities at 23.38% as against the Operating Margin of 9.37% earned by the assessee and hence, the A.O./ TPO has made an adjustment of Rs.5,03,92,400/- u/s 92CA in respect of the software development services rendered by the assessee. The assessee approached the DRP but without any success. Accordingly, the TPO made adjustment of Rs.5,03,92,400/- u/s.92CA of the I.T. Act.

18. The Ld. Counsel for the assessee strongly challenged the order of the TPO. He submitted that the addition made by the TPO is not justified. The Ld. Counsel for the assessee gave reasons for not excluding the following companies as comparable, the details of which are as under:

Maars Software International Ltd. [MAARS] :
19. The Ld. Counsel for the assessee submitted that the TPO has discussed this company on page 33 of his order. He rejected Maars as a comparable entity on the ground that it is carrying out significantly different functions. For the above proposition, the TPO referred to the following para in the Directors' Report—

"During the year, the company will continuously focus on the areas of products and consulting based on the considerable progress achieved during the previous year. With the continuous efforts during the year too, the company is confident of achieving growth on the areas of-products and services especially in the regions of Middle - East and Far - East."

19.1 The Ld. Counsel for the assessee submitted that the TPO has placed reliance on the above discussion in the Directors' Report to justify that Maars is not comparable with the assessee company. He submitted that the TPO has referred to a small para given in the Directors' Report but has not appreciated the correct facts of the case while rejecting the contention of the assessee. Referring to the copy of the directors report placed at paper book page No. 495 he submitted that the said para refers to the future plans of the company and it does not indicate the position of the company for the year under consideration. Accordingly, he submitted that the inference drawn by the A.O. merely by relying on the above para is not correct Referring to paper book page 501 he submitted that Maars is engaged in business of software development and this fact is evident from the Auditor's Report of Maars wherein it is mentioned that Maars is engaged in software development and it does not carry any inventories. Referring to page 498 of paper book-III he drew the attention of the Bench to the Director's report where the break up of expenditure is given and submitted that substantial expenditure has been incurred by the said company on software development activity. He accordingly submitted that Maars is engaged in software development activity and accordingly, the same is functionally comparable with the assessee company. Even though these were clarified before DRP they did not consider the same. He accordingly submitted that the said company cannot be excluded.

Vjil Consulting Ltd. [Vjil] :
20. The Ld. Counsel for the assessee submitted that the only reason given by the TPO for rejecting VJIL is that the said company has incurred losses. Referring to the submissions given before the DRP, copies of which are placed at page 561 of the paper book, the Ld. Counsel for the assessee submitted that profits and losses are part and parcel of business activity and hence, merely because VJIL has incurred loss in this year, the TPO is not justified in rejecting the said company from the list of final comparables. Referring to page No.402 of Paper book-II he submitted that VJIL has been consistently earning profits for the preceding five years i.e. from A.Y.2002-03 to A.Y.2006-07 and thus, it is not a persistent loss making company. He accordingly submitted that merely because VJIL has incurred loss in this year, there is no reason to reject the said company from the list of final comparable entities. For the above proposition, he relied on the decision of the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd.v. Dy. CIT (International Taxation) [2014] 147 ITD 463/[2013] 35 taxmann.com 350 (Pune - Trib.)wherein it has been held that a company should not be rejected merely because it has incurred losses, unless it is shown that the said company is a persistent loss making company. Referring to the decision of the Delhi Bench of the Tribunal in the case of Qualcomm India (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 17/[2013] 37 taxmann.com 306 he submitted that the Tribunal in the said decision has held that simply because a company has incurred loss in one year cannot be a ground to reject the said company. Accordingly, he submitted that the TPO is not justified in rejecting VJIL as a comparable entity with the assessee company.

Quintegra Solutions Ltd. (Quintegra) :
21. The Ld. Counsel for the assessee submitted that the TPO has discussed this company on page 33 of his order. He rejected this company on the ground that it is functionally different. The TPO has relied upon the following para in the Directors' Report for holding so :

"The company's strategy is to focus on the high-growth, high-value segments of the IT industry. The companies broad capabilities include application management, product engineering, enterprise solutions such as SAP, testing & validation, technology consulting, professional services and proprietary product suites."

21.1 The Ld. Counsel for the assessee submitted that Quintegra is engaged in the business of software development. Referring to para 1 of Management Discussion and Analysis Report he submitted that it is mentioned that Quintegra is engaged in IT services. Even in the P & L A/c placed on page 516 of the paper book, it is to be noted that the main item of revenue is from software services. Even in the segment reporting, the details are given in respect of the different segments like CRM, Telecom and Financial Services wherein Quintegra provides software services. He accordingly submitted that Quintegra is engaged in IT services. Merely because the said company is engaged in developing different types of software as compared to the assessee company, there is no reason to hold that the said company is not comparable with the assessee. Referring to para 5.10 on pages 560-561 of paper book-III he submitted that these facts were also clarified by the assessee vide its submission to DRP. He accordingly submitted that the TPO is not justified in excluding Quintegra from the list of final comparable entities. He accordingly submitted that Maars, VJIL and Quintegra should be included in the final list of comparables while determining the AEP.

21.2 The Ld. Counsel for the assessee submitted that the TPO is not justified in including the following companies in the list of final comparables since these companies are not comparable.
Infosys Technologies Ltd. (Infosys) :

22. The Ld. Counsel for the assessee submitted that Infosys is the market giant in the field of software development and it assumes all risks leading to higher profits whereas the assessee company is a captive unit of its holding company, Deere & Co., USA and it assumes only limited risks. There is vast difference in the size of operations, assets and risks borne by Infosys and that of the assessee company. For instance, the turnover of Infosys for this year is Rs.13,149 Crs. [page 423 of P.B- II] as against the turnover of the assessee company of Rs.39.34 Crs. from software development-activity [page 37 of TPO's order]. He submitted that Infosys owns a large number of brands/ proprietary products which is not the case of the assessee company. Further, in the TPO's order for A.Y.2006 - 07 in the assessee's own case, the TPO has held that Infosys is not comparable with the assessee company on the ground that its turnover is far more than that of the assessee and hence, it is not comparable. He also relied on the following decisions wherein it has been held that considering the huge 'differences in revenues, assets and risks assumed by Infosys and other smaller companies, Infosys cannot be considered as a comparable entity with smaller companies :

a.		C1T v. Agnity India Technologies (P.) Ltd. [2013] 219 Taxman 26/36 taxmann.com 289 (Delhi)
b.		Adaptec (India) (P.) Ltd. v. Dy. CIT [IT Appeal No. 1801(Hyd) of 2009]
c.		Willis Processing Services (India) (P.) Ltd. v. Dy. CIT [2013] 57 SOT 339/30 taxmann.com 350 (Mum)

He accordingly submitted that Infosys should be excluded from the list of comparables.
Transworld Infotech Ltd. (Transworld) :

23. The Ld. Counsel for the assessee referring to page 459 of paper book-III submitted that the revenue from export of services in the case of this company is only about 2.21% of the total revenue of the company. He submitted that the assessee company has derived 100% of its revenues from exports and hence, considering the differential market conditions and risks assumed in the export market and the domestic market, Transworld cannot be considered as a comparable entity with the assessee company. Referring to para 2.1.8 of page 10 of the TPO's order the contention that companies whose foreign exchange earnings are less than 25% of the total earnings should not be considered as comparable with the assessee company has been accepted by the TPO and accordingly, he has rejected Melstar Information Technologies Ltd. as a comparable entity. Following the same reasoning he submitted that Tranworld may be excluded from the final list of comparable entities for this year.

23.1 Without prejudice, the ld. Counsel for the assessee submitted that the financial year considered for determining the Operating Margin of Transworld is 01.07.2006 to 30.06.2007 as against the financial year of the assessee company which is 01.04.2006 to 31.03.2007. He submitted that the provisions of Rule 10B(4) of the Income Tax Rules 1962 provide that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Accordingly, Transworld is not comparable with the assessee company. For the above proposition, he relied on the decision of the Pune Bench of the Tribunal in the case of PTC Software (India) (P.) Ltd. [IT Appeal No. 1605(Pune) of 2011] for A.Y.2007 - 08 wherein the Bench has excluded Transworld in view of the above reasoning.
Helios & Matheson Information Technology Ltd. (Helios) :

24. The Ld. Counsel for the assessee submitted that Helios is functionally different from the assessee company. Referring to the decision of Pune Bench of the Tribunal in the case of PTC Software (India) (P.) Ltd. (supra), (Copy of which is placed in the paper book at page 17) he submitted that the assessee company was engaged in providing software development services. The TPO considered Helios as a comparable entity for A.Y. 2007 - 08. The assessee contended that Helios was also engaged in functions other than rendering software development services and hence, it was not comparable with the assessee. The Tribunal held that Helios was not comparable with companies rendering software development services and thus, the said company was excluded. He submitted that like PTC Software (India) Pvt. Ltd., the assessee is also engaged in rendering software development services and hence, the facts and the year under consideration being similar as in that case, therefore, Helios has to be held as functionally not comparable with the assessee company in view of the above cited decision. He accordingly submitted that Helios may be excluded from the list of final comparables while determining the ALP.

24.1 Without prejudice, the Ld. Counsel for the assessee submitted that in this year, Helios has earned Operating Margin of 40.60% which is far more than the normal profit margin earned by the companies engaged in software development business. He submitted that Helios was established in 1991 and thereafter, it has acquired various entities including 'The Laxmi Group Inc.', USA acquired in 2001 and 'The A Consulting Team', USA acquired in 2006. He submitted that Helios has overseas subsidiaries and offices in the US and Singapore. Further, the major clients of the said 'company are all Fortune 500 organisations. The said company has set up strategic delivery centres at important locations to cater to the needs of its clients located across the Globe. All these factors have led to earning super normal profits by the said company. He submitted that the above facts have been extracted from the Article published in 'BusinessIndia' Magazine which has been sourced from the information provided by Shri R. Muralikrishna, co-founder of Helios and CRISIL reports.

24.2 He submitted that the assessee company is a captive unit wholly owned by Deere & Co., USA which works on a cost plus model. Thus, the assessee assumes limited risks and hence, it is not possible for the assessee company to earn such high profit margins. Therefore, Helios is not comparable with the assessee company.

24.3 In respect of the above three companies, the Ld. Counsel for the assessee submitted that the assessee had selected these companies as comparable entities in the course of TP proceedings. However, in view of the reasons mentioned above, these companies are not comparable with the assessee company. For the above proposition, he relied on the following decisions wherein it has been held that even where the assessee had identified certain companies as comparable at the time of TP study, such companies may be excluded at a later stage if they are found to be not comparable on facts -

a.		Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (Chd.) (SB)
b.		Sapient Corpn. (P.) Ltd. v. Dy. CIT [2011] 46 SOT 56 (URO)/11 taxmann.com 69 (Delhi)
c.		Teva India (P.) Ltd. v. Dy. CIT [2011] 44 SOT 105 (Mum.) (URO)

24.4 The Ld. Counsel for the assessee submitted that the TPO is not justified in newly introducing the following two companies as comparable entities with the assessee company.
Kals Information Systems Ltd. (Kals) :

25. The Ld. Counsel for the assessee submitted that Kals is engaged in provision of software development services as well as sale of software products and the separate segmental data is not available for software development services business. Accordingly, he submitted that Kals is not comparable with the assessee company.

25.1 Referring to para 5.15 on page 563-564 of paper book-III he submitted that the assessee has clarified this issue in its submission to DRP The relevant extracts of the Annual Report of Kals are on pages 424 - 427 of P.B.- II. Referring to the decision of the Pune Bench of the Tribunal in the case of BindviewIndia (P.) Ltd. v. Dy. CIT [2013] 145 ITD 436/34 taxmann.com 164 and PTC Software (India) (P.) Ltd. (supra), he submitted that the Tribunal in the aforesaid cases has held that Kals is engaged in software products business and therefore, it cannot be considered as a comparable entity in respect of a software development service provider. He accordingly submitted that Kals cannot be considered as a comparable entity.
Compucom Software Ltd. (Compucom) :

26. The Ld. Counsel for the assessee submitted that Related Party Transactions in the case of Compucom are more than 25%. In this year, the RPT expenses incurred by Compucom are Rs.6.75 Crs. against the total expenses of Rs. 15.77 Crs. incurred by the said company. [Refer para (a) on page 36 of TPO's order]. Therefore, the proportion of RPT transactions works out to 42.80%. He submitted that for the purposes of computing the RPT transactions, one has to check the proportion of RPT Sales to Total Sales or RPT Expenses to Total Expenses and if either of the two ratios exceeds the prescribed limit, then the company should not be considered as a comparable entity. He submitted that even if a company has -procured substantial amount of services from its related parties or has derived substantial revenues from its related parties, then the profit margin of such company may be materially affected. Referring to the decision of the Pune Bench of the Tribunal in the case of PTC Software (India) (P.) Ltd. (supra), he submitted that the above proposition has been accepted by the Bench and Compucom has been rejected as comparable on the ground that the RPT transactions (expenses) of the said company are more than 25% for A. Y.2007 - 08.

26.1 Without prejudice, he submitted that the RPT filter is to be adopted at 15% and not at 25% of total transactions in view of the recent decision of ITAT, Mumbai in the case of Willis Processing Services (India) (P.) Ltd. (supra). In that case, the Tribunal held that generally the RPT filter is to be adopted between the range of 10% - 25%. However, where a large number of comparable entities are available, the RPT filter should be adopted at 15% of total transactions and the limit of RPT transactions is to be relaxed to 25% only where sufficient number of comparable entities are not available for determining the ALP of international transactions entered by the tested party. He submitted that in the instant case, a large number of companies are found to be functionally comparable with the assessee company and hence, the RPT filter should be adopted at the level of 15% and not at 25% in view of the above ruling. He submitted that as per the working of the TPO on page 36 of his order, the RPT transactions in the case of Compucom is 18.58% i.e. more than 15% and therefore, Compucom should be excluded from the final list of comparable entities.
Addition of Rs. 4,63,25,506/- in Respect of design engineering, testing and authoring services segment :

27. The Ld. Counsel for the assessee submitted that the assessee company has provided design, engineering and other related services to its AE. These services include modification/ improvement in the designs of existing components, 3D modeling of the same and analysis of the designs. The total turnover of these activities for this year was Rs.43,48,75,003/-. In the TP Study Report, the assessee has selected 4 companies as comparable entities for determining ALP of design engineering, testing and authoring services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 2 comparable entities on the basis of single year data, the details of which are as under :

Sr. No.	Companies selected as comparable by the TPO	OM
1	Ace Software Exports Ltd.	-7.04
2	Genesys International Corporation Ltd.	12.52
	Avg. Operating Margin	2.74

He submitted that as per the said list, the Avg. Operating Margin [Operating Profit/ Operating Cost] of the comparable entities was worked out at 2.74% as against the Operating Margin of the assessee company of 11.29%. Hence, it was submitted that the design engineering and other allied services rendered by the assessee to its AE were at ALP.

27.1 He submitted that the TPO did not accept the contention of the assessee. Out of the 2 comparable companies selected by the assessee, the TPO has rejected 1 company and has newly introduced one additional company. The final list of comparable entities in this segment is on page 40 of the TPO's order which is as under :

Sr. No.	Companies selected as comparable by the TPO	OM (%)
1	Genesys International Corporation Ltd.	12.52
2	KLG Systel Ltd.	33.74
	Avg. Operating Margin	23.13

27.2 The TPO accordingly worked out Avg. Operating Margin of the comparable entities at 23.13% as against the Operating Margin of the assessee company at 11.29% and made an adjustment of Rs.4.63 Crs. in respect of the design engineering and allied services rendered by the assessee to its AE.

27.3 The Ld. Counsel for the assessee submitted that the addition made by the TPO is not justified. He submitted that the TPO is not justified in introducing KLG Systel as a comparable entity with the assessee company since the revenue from export of services in the case of this company is only about 0.24% of the total revenue of the company whereas 100% of the revenues generated by the assessee company are through export of services. This issue is already clarified by the assessee in its submission to DRP [para 6.11- 6.12 on pages 570-571 of P.B. - III] and the computation of foreign exchange earnings to total revenue ratio in the case of KLG Systel is on page 571 of P.B. - III. The relevant excerpts of the annual report of KLG Systel for this year are on pages 433 - 434 of P.B. - II. Thus, in view of the submissions made in para 6.11 above, KLG should be rejected in this year. He submitted that KLG Systel was rejected by the DRP in its order for A.Y.2008- 9 in assessee's own case on the ground that the exports of the said company were below 25% of total revenue and hence, the DRP is not justified in accepting the said company as a comparable entity in this year [page 609 of P.B. - III]. Without prejudice, he submitted that KLG Systel is functionally different. For this purpose, he referred to the detailed submissions made before the DRP. [para 6.9-6.10 on pages 569 - 571 of P.B. - III]. He accordingly submitted that KLG Systel may be excluded from the list of final comparable entities.

Addition of Rs.62,72,964/- In Respect of Business Support Services Segment :
28. The Ld. Counsel for the assessee submitted that the assessee company has provided business support services to its AE which include regional supply management services, global job-evaluation services, evaluation of vendors, quality audit, etc. etc. The total turnover of this activity in the current year was Rs.3,59,99,094/-. In the TP Study Report, the assessee has selected 13 companies as comparable entities for determining ALP of business support services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 11 comparable entities on the basis of single year data. The list of companies selected by the assessee is as under -

Sr. No.	Companies selected as comparable by the TPO	OM (%)
1.	Capital Trust Ltd	-6.71
2.	Crisil Ltd	21.41
3.	Cyber Media Events Ltd	8.43
4.	Educational Consultants Ltd	10.64
5.	Electronica Machine Tools Ltd	10.49
6.	ICRA Management Consulting Services Ltd	15.23
7.	IDC India Ltd	15.33
8.	NTPC Electric Supply Company Ltd	16.78
9.	Priya International Ltd	13.97
10.	T S R Darashaw Ltd	44.47
11.	Times Information Media Ltd	-26.59
	Avg. Operating Margin	11.22%

28.1 As per the said list, the Avg. Operating Margin [Operating Profit/ Operating Cost] of the comparable entities was worked out at 11.22% as against the Operating Margin of the assessee company of 10.95%. Hence, it was submitted that the design engineering and other allied services rendered by the assessee to its AE were within the margin of +/- 5% from the ALP and hence, no adjustment u/s 92C was required in case of this segment.

28.2 However, the TPO did not accept the contention of the assessee. Out of the 11 comparable companies selected by the assessee, the TPO rejected 5 companies and has newly introduced 2 companies. The final list of comparable entities in this segment which is on pages 45 - 46 of the TPO's order are as under—

Sr. No.	Companies selected as comparable by the TPO	OM (%)
1	Capital Trust Ltd.	-6.71
2	ICC International Agencies Ltd.	82.92
3	ICRA Management Consulting Services Ltd.	15.23
4	ICRA Online Ltd.	63.33
5	IDC (India) Ltd.	15.33
6	Priya International Ltd.	13.97
7	TSR Darashaw ltd.	36.60
8	Crisil Ltd.	21.41
	Avg. Operating Margin	30.26

28.3 The TPO accordingly worked out Avg. Operating Margin of the comparable entities at 30.26 % as against the Operating Margin of the assessee company at 10.95 % and made an adjustment of Rs.62.72 lacs in respect of the business support services rendered by the assessee to its AE.

28.4 The Ld. Counsel for the assessee submitted that the addition made by the learned TPO is not justified. He submitted that the TPO is not justified in including the following two companies in the list of final comparable entities and these companies should be rejected.
Icc International Agencies Ltd. (ICC) :

29. The Ld. Counsel for the assessee submitted that this company is a subsidiary of Indian Card Clothing Company and is engaged in the business of textile machines. ICC International Agencies is acting as a commission agent. This fact is evident from the web page of the said company and business profile of the said company enclosed on pages 435 - 437 of P.B. - II. Thus, the said company is engaged in a totally different line of business and hence, this company is functionally different from the assessee company. This issue has also been clarified by the assessee in its submission to the DRP [para 7.5 on page 573 of P.B. - III]. Accordingly, he submitted that ICC should be excluded from the list of final comparables since it is functionally not comparable. Without prejudice, he submitted that ICC has earned Operating Margin of 82.92% which is highly improbable in the business support services sector especially considering the fact that the assessee is a captive unit. Accordingly, he submitted that ICC is not comparable with the assessee company and the same may be excluded from the list of final comparable entities.
Icra Online Ltd. (ICRA) -

30. The Ld. Counsel for the assessee submitted that this company is discussed by the TPO on page 44 of his order. He has reproduced a small para from the Annual Report of ICRA Online to justify that the said company is comparable with the assessee company. He submitted that ICRA Online is engaged in functionally different from the assessee company and it is also engaged in providing software services and thus, the said company is not comparable with the assessee company. He referred to the extract of the web pages wherein it is mentioned that ICRA Online is a leading Information Services and Technology Solutions provider [page 438 of Paper Book - II]. Further, in the Directors' Report of ICRA Online, it is mentioned that the said company is engaged in providing Information Products to various mutual fund houses and the flagship product of the said company is 'MFI Explorer'. He submitted that it is engaged in providing business support services to its AE and unlike ICRA Online, the assessee is not engaged in development and sale of products. Accordingly, ICRA Online is not comparable with the assessee company.

30.1 Further, he submitted that the TPO has considered the Information providing services segmental results. ICRA Online is also engaged in providing BPO Services along with providing Information Services. He submitted that BPO services also fall within the category of business support services and hence, if, at all, ICRA Online is to be considered as comparable with the assessee company, then the consolidated results of both segments of the said company i.e. Information Services Segment and BPO Services Segment should be considered while determining the Operating Margin earned by this company.

30.2 The Ld. Counsel for the assessee submitted that there are differences between the working capital requirements of the assessee company and the various comparable entities and this has affected the Operating Margins of the various companies. Accordingly, he requested for granting of proper working capital adjustment in respect of the above differences. He submitted that this issue has been clarified by the assessee in its submission to the learned DRP [para 8 - 8.2 on page 575 of P.B. - III]. He referred to his reliance on the following decisions wherein it has been held that appropriate adjustment is to be made in respect of the differences in working capital of the comparable companies -

a.		Demag Cranes & Components (India) (P.) Ltd. v. Dy. CIT [2012] 49 SOT 610/17 taxmann.com 190 (Pune)
b.		Cummins Turbo Technologies Ltd. case (supra)
c.		Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi)
d.		E-Gain Communication (P.) Ltd. v. ITO [2009] 118 ITD 243 (Pune)
e.		Sony India (P) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi)

30.3 The Ld. Counsel for the assessee submitted that the assessee company is a captive unit which bears very low risks as compared to other companies operating in the open market which have been considered as comparable with the assessee company and further, it does not own any intangibles or technology. As a corollary, the profits earned by the assessee company would be much lower as compared to the other companies. This issue has been clarified by the assessee in the submission to the DRP. [para 9 on pages 575 -576 of P.B. - III]. Accordingly, he requested that 20% adjustment to the ALP may kindly be granted on account of the above differences. For the above proposition, he relied on the decision of the Delhi Bench of the Tribunal in the case of Sony India (P.) Ltd. (supra), and the following decisions :

a.		Mentor Graphics (Noida) (P.) Ltd. case (supra)
b.		Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.)

30.4 Lastly, the Ld. Counsel for the assessee submitted that if, after allowing the above adjustments, the difference between the Operating Margin of the assessee company and the Avg. Operating Margin of the various comparable companies does not exceed 5%, then the benefit of second proviso to section 92C(2) may be granted to the assessee company and accordingly, no addition should be made in the case of the assessee.

31. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO/TPO/DRP. So far as the adjustment of Rs.5,03,32,400/- to the ALP of the International Transaction of Software Development is concerned, he submitted that the TPO has given a detailed reasoning for arriving at the PLI margin of the comparables at 23.38% as against 14.53% worked out by the assessee. After taking into account of these facts and after taking into account the objections raised by the assessee, the DRP has confirmed the action of the AO/TPO and therefore the grounds raised by the assessee in grounds of appeal No.5.1 is not acceptable.

31.1 As regards the two comparables which was added by the TPO namely Kals Information Systems Ltd and Compucom Software Ltd., he submitted that the same is justified. So far as the comparable Kals Information System Ltd., is concerned, he submitted that the company is engaged in Software Development. The website of the company shows that the company provides services in joint software project execution models, just in time teams as well as shadow teams and technology mentoring services. The company also provides services for end-user organizations and for transition management. This shows that the company is engaged into the business of software development services similar to the assessee company.

31.2 So far as the comparable Compucom Software Ltd. is concerned he submitted that the DRP after considering the arguments advanced by the assessee has confirmed the action of the TPO in selecting the above case as comparable, therefore, the grounds raised by the assessee is not acceptable.

31.3 So far as the adjustment of Rs.4,63,25,506/- in respect of provision of Design Engineering and Testing services by the assessee to its AE is concerned, the Ld. Departmental Representative submitted that the TPO has given detailed reasoning for exclusion of one comparable and addition of another comparable, namely KLG Systel which was otherwise comparable but was rejected by the assessee. He submitted that the final set of two comparable companies was selected by the TPO whose average PLI margin (OP/OC) was arrived at 23.13%. Referring to the reasoning given by the TPO for arriving at PLI margin of the comparables at 23.13% as against 10.82% worked out by the assessee, the Ld. Departmental Representative submitted that the TPO is justified in rejecting the comparables given by the assessee and addition of the comparable selected by the TPO.

31.4 So far as Ace Software Exports Ltd., taken by the assessee as comparable is concerned, he submitted that this company is engaged in e-publishing and CAD/CAM. No segmental data was available, hence, the company is functionally different and not considered as a comparable. So far as Federal Technologies Ltd., is concerned, he submitted that the financial data of this company for F.Y. 2006-07 was not available in public domain for which this company was not considered as a comparable. So far as Pentasoft Technologies Ltd., is concerned, he submitted that as per the information in Annual Report, this company is earning income from Product Services and is not engaged in Design Engineering Services. Secondly, the related party transactions are exceeding 25%, therefore, this company cannot be considered as comparable.

31.5 As regards the request of the assessee for exclusion of KLG Systel Ltd. is concerned, he submitted that the assessee itself has rejected this company as a comparable stating that it is functionally different. However, the TPO has noticed from the Director's report that this company is engaged in planning, design and erection and large scale infrastructural projects in India. The website of this company also states so. Further, the website of the company shows that this company is engaged in Design Engineering Services, therefore, this company is engaged in Design Engineering Services which is functionally similar to the assessee company, therefore, the action of the TPO is justified.

31.6 As regards the adjustment of Rs.62,72,964/- to the ALP of International Transaction of Design Support Services is concerned, he submitted that the assessee has mentioned the nature of international transaction as "provision of Regional Supply Management" services, however, no such services or narration is mentioned in the TP study report. He submitted that the assessee had selected TNMM method as most appropriate method for benchmarking the International Transaction of Business Support Services provided to the AE. He submitted that the TPO had given detailed reasoning for arriving at the PLI margin of the comparables at 30.26% as against 15.29% worked out by the assessee. The DRP has also confirmed the action of the AO in rejecting 5 comparables for various reasons. Relying on various decisions, he submitted that the action of the TPO/AO/DRP should be upheld and the grounds raised by the assessee should be dismissed. He also relied on the following decisions:

1.	Symantec Software Solutions (P.) Ltd. v. Asstt. CIT [2011] 46 SOT 48/11 taxmann.com 264 (Mum.)
2.	Kodiak Networks (India) (P.) Ltd. v. Asstt. CIT [2012] 51 SOT 191/18 taxmann.com 32 (Bang.)
3.	Premier Exploration Services (P.) Ltd. v. ITO [2013] 35 taxmann.com 422/[2014] 146 ITD 580 (Delhi - Trib.)
4.	Willis Processing Services (India) (P.) Ltd.'s case (supra)
5.	Alberta Printed Circuits Ltd. v. Queen 2011 TCC 232 (Tax court of Canada)
6.	ADP (P.) Ltd. v. Dy. CIT [2011] 57 ITR (Trib.) (Hyd.) 310
7.	Dy. CIT v. Delloite Consulting (India) (P.) Ltd., [2011] 61 DTR (Trib.) (Hyd.) 101
8.	Marubeni India (P.) Ltd. v. Addl.CIT [2013] 33 taxmann.com 687 (Delhi - Trib.)
9.	Vedaris Technology (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 316 (Delhi)

32. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions relied on by both the sides before us. There is no dispute to the fact that the assessee company during the impugned assessment year has provided 3 types of services to its AE's namely, (a) Software Development Services, (b) Design Engineering, Testing and Authoring Services, Development, Maintenance and Testing of Embedded Systems Software Services and (c) Business Support Services. The details of the above transactions have already been given in Para 16.1 of the impugned order and the assessee in all the transactions have adopted TNMM method as the most appropriate method for determining the ALP of the international transaction entered into by it.

32.1 So far as the provisions of Software Development Services are concerned, we find as against the value of transaction of Rs.39.29 crores, the TPO made adjustment of Rs.5,03,92,400/-. While doing so, he rejected the average operating margin of 13.07% shown by the assessee in respect of 27 companies as comparable. We find the TPO rejected 16 companies out of the 27 companies and added 2 new companies as comparable entities, namely Kals Information Systems Ltd., and Compucom Software Ltd. From the 16 companies so rejected by the TPO out of the 27 companies shown by the assessee, we find the assessee is objecting to the exclusion of the following companies as comparables :

1.	Maars Software International Ltd.,
2.	VJIL Consulting Ltd.,
3.	Quintegra Solutions Ltd.,
4.	Infosys Technologies Ltd.,
5.	Transworld Infotech Ltd.,
6.	Helios and Matherson Information Technology Ltd.,

32.2 From the various details furnished by the assessee, we find Maars Software International Ltd., (Maars) was rejected by the TPO as a comparable on the ground that it is carrying out significantly different functions. The basis of such arrival by the AO was the report of the Director. It is the submission of the Ld. Counsel for the assessee that the above said para of the Directors report mentions about the future plans of the company and does not indicate the position of the company for the year under consideration. We find from page 501 of the paper book which is the annexure to the Auditor's report that in clause 2 of the said report it has been mentioned "the company is in the business of software development and training and does not carry on inventory". Similarly, we find from page 498 of the paper book, which shows part of the Directors report for the year ending 31-03-2007, that the company has given break up of software development expenditure, salary, consultancies and allowances which account for 3259.63 lakhs and which amounts to 96.10% of the total expenditure (4239.40 for 31.03-2006 which is 93.54% of the total expenditure). In view of the above, we find merit in the submission of the Ld. Counsel for the assessee that Maars Software International Ltd., which is engaged in Software Development activity is functionally comparable with the assessee company, therefore, the same cannot be excluded. We accordingly, direct the AO to include the same as a comparable.

32.3 So far as the VJIL Consulting Ltd., is concerned, we find the same was rejected by the TPO on the ground that the comparable incurred losses during the year. From the various details furnished by the assessee in the paper book at page 402, we find the company was earning profit from 31-03-2002 till 31-03-2006 and only for the year ending 31-03-2007 it has incurred losses. Therefore, it is not a persistent loss making company. We find from the details furnished by the assessee that the company has earned the following profit in the last 5 years, i.e. Rs.0.73 crores for the year ending 31-03-2002, 0.53 crores for the year ending 31-03-2003, Rs. 0.86 crores for the year ending 31-03-2004, Rs.0.53 crores for the year ending 31-03-2005 and Rs.0.34 crores for the year ending 31-03-2006. Only for the year ending 31-03-2007, the company has incurred loss of Rs.10.43 crores. The profit for the past 5 years was profit before tax. Therefore, merely because VJIL Consulting Ltd., has incurred loss in this year, the same in our opinion cannot be rejected from the list of comparables. This view of ours is supported by the decision of the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd. (supra), wherein it has been held that the company should not be rejected merely because it has incurred losses. Similarly, the Delhi Bench of the Tribunal in the case of Qualcomm (India) (P.) Ltd. (supra) has held that simply because the company has incurred loss in one year the same cannot be a ground to reject the company from the list of comparables. Since the Revenue has not shown that VJIL Consulting Ltd., is a persistent loss making company, therefore, merely because this company has incurred loss during the impugned financial year, the same in our opinion cannot be a ground to reject the same from the list of comparables. We accordingly direct the AO/TPO to include the same in the list of comparables.

32.4 So far as Quintegra Solutions Ltd. is concerned, we find the TPO rejected the same from the list of comparables on the basis of certain paras in the report of the Directors. It is the submission of the Ld. Counsel for the assessee that Quintegra Solutions Ltd., is engaged in the business of software development. From the profit and loss account of the company placed at page 516 of the paper book we find Quintegra has declared income from software services at Rs.62.72 Crores for the year ending 31-03-2007 as against total receipt of Rs.62.76 crores. From the above, it is clear that the income from software services accounts for 99.9% of the total revenue. In view of the above, we find merit in the submission of the Ld. Counsel for the assessee that Quintegra Solutions Ltd., should not have been rejected from the list of comparables. We accordingly direct the AO/TPO to consider Quintegra Solutions Ltd., in the list of comparables and not to exclude the same.

33. Now the second limb of the argument of the Ld. Counsel for the assessee is that certain companies which though included by it in the list of comparables should be excluded from the list of comparables. Names of such companies are as under :

1.		Infosys Technologies Ltd.,
2.		Transworld Infotech Ltd.,
3.		Helios and Metherson Information Technology Ltd.,

33.1 Now the first question that has to be answered is as to whether the companies which were considered by the assessee in the TP study report can be excluded from the list of comparables. We find the Chandigarh Special Bench of the Tribunal in the case of Quark Systems (P.) Ltd. (supra) has held that a taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. It was accordingly held that when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the otherside cannot claim to have a vested right in injustice being done due to some mistakes on its part. Accordingly, the comparable which was taken by the assessee as well as the AO was directed to be excluded from the list of comparables and the matter was restored to the file of the AO for fresh adjudication. Similarly, the Delhi Bench of the Tribunal in the case of Sapient Corporation (P.) Ltd.(supra) and the Mumbai Bench of the Tribunal in the case of Teva India (P.) Ltd. (supra) has held that even where the assessee has identified certain companies as comparable at the time of TP study report such companies may be excluded at a later stage if they are found to be not comparable on facts.

33.2 In view of our above discussion, we proceed to accept the contention of the Ld. Counsel for the assessee that although certain companies were accepted by it as comparable in the TP study report and if due to subsequent evidence that has come to its notice that these companies are not to be included in the list of comparables, then in that case those companies can be excluded.

34. Now coming to the merit of each case, we find the assessee in its TP study report has included Infosys Technologies Ltd., as comparable. From the various details furnished by the assessee, we find the TPO in its order for A.Y. 2006-07 in assessee's own case has held that Infosys is not a comparable company with that of the assessee company because of huge disparity between the turnover of Infosys Technologies Ltd. with that of the assessee company.

34.1 We find the Hon'ble Delhi High Court in the case of Agnity India Technologies (P.) Ltd., (supra) has held that Infosys Technologies Ltd., cannot be considered as a comparable entity with that of smaller companies. In various other judicial decisions it has been held that considering huge difference in revenues, assets and risks assumed by Infosys and other smaller companies, Infosys Technologies Ltd., cannot be considered as comparable entity with smaller companies. In this view of the matter and considering the fact that the TPO in assessee's own case in the immediately preceding assessment year has excluded Infosys as a comparable, therefore, we direct the AO/TPO to exclude Infosys from the list of comparables.

35. So far as Transworld Infotech Ltd., is concerned, we find from page 459 of the paper book that as against total revenue of Rs.20,61,12,657/- the income from software in foreign currency is Rs.45,44,691.66 which is just 2.21% of the total revenue; whereas in the case of the assessee it has derived 100% of its revenue from exports. Therefore, Transworld, in our opinion cannot be considered as a comparable entity with that of the assessee company. Further, we find from the order of the TPO that according to him the companies whose foreign earning was less than 25% of the total earning, should not be considered as a comparable and accordingly he has rejected Melstar Information Technology Ltd., as a comparable entity for this precise proposition. Therefore, we find merit in the submission of the Ld. Counsel for the assessee that by following the same logic Transworld Infotech Ltd., should also be excluded from the list of comparables.

35.1 We further find the profit and loss account of Transworld Infotech Ltd., gives the year ending as 30-06-2007 and 30-06-2006 for the preceding year whereas the assessee is following financial year as its accounting year. Therefore, we also find merit in the submission of the Ld. Counsel for the assessee that in view of the provisions of Rule 10B(4) of the I.T. Rules, 1961 that the data to be used in analyzing the comparability of an uncontrolled transaction with an International transaction shall be the data relating to the financial year in which the international transaction has been entered into.

35.2 Similar view has been taken by the Pune Bench of the Tribunal in the case of PTC Software India(P.) Ltd. (supra) wherein the Tribunal has excluded Transworld Infotech. Ltd., on the ground that the data adopted of Transworld Infotech Ltd., does not relate to the financial year in which the International Transaction has been carried out by the assessee. On this point the said concern was excluded from the list of comparables. In view of the above we hold that Transworld Infotech is not a comparable entity. In view of the above, we direct the TPO/AO to exclude Transworld Infotech Ltd., from the list of comparable.

36. So far as Helios and Matherson Information Technology Ltd., is concerned, we find the Pune Bench of the Tribunal in the case of PTC Software India (P.) Ltd. (supra), has excluded the same from the list of comparables by observing as under :

"20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables."

36.1 Since the Pune Bench of the Tribunal in the case of PTC Software India (P.) Ltd. (supra), has already taken a view that Helios and Matherson Information Ltd., is not a comparable and is functionally different, therefore, we direct the TPO/AO to exclude the same from the list of comparables.

37. So far as the fresh addition of 2 companies, namely Kals Information System Ltd., and Compucom Software Ltd., are concerned, we find the Pune Bench of the Tribunal in the case of Bindview India (P.) Ltd. (supra), has observed as under :

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

37.1 Similarly, we find the Pune Bench of the Tribunal in the case of PTC Software India (P.) Ltd.(supra), has observed as under :

"16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment.

17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F. Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services.

18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year.

19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services."

37.2 Similarly, in the case of PTC Software (India) (P.) Ltd. (supra), we find the Pune Bench of the Tribunal has rejected Compucom Software Ltd., as a comparable on the ground that the RPT Transactions (Expenses) of the assessee with that the said company are more than 25% for A.Y. 2007-08. The relevant observation of the Tribunal is as under :

"14. Similarly, in the case of Compucom Software Ltd., the TPO has observed in para 6.3.19 of his order that the said concern has nil sales revenue from related parties against total sales of 23.82 crores, but has incurred RPT expenses of Rs.6.65 crores against total expenses of 17.78 crores. The ratio of RPT to total transactions has been computed at 15.19% by the TPO. Again the TPO has adopted the denominator of Rs.41.60 crores inclusive of total sales whereas the numerator is Rs.6.65 crores, comprising of only RPT expenses and no RPT sales. Therefore, the denominator is to be corrected at Rs.17.78 crores and the correct percentage of RPTs would be 37.40%, i.e., RPT expenses/total expenses. The RPTs being in excess of the 25% filter adopted by the TPO, the said concern in our view is also liable to be excluded from the list of comparables for the purpose of comparability analysis.

15. Before parting, we may also observe that the manner in which the RPT filter has been applied by the TPO in the year is inconsistent with his own approach in the A.Y. 2006-07. For this purpose, the appellant has referred to pages 668 to 751 of the Paper book for the copy of the order of the TPO dated 29.10.2009 for A.Y. 2006-07, specifically at pages 689 to 690, where the TPO has taken either the sales or expenses as the appropriate base, as the case may be, and not aggregate of sales and total expenses even where related party transactions in one of the two was absent."

37.3 In view of the decision of the Pune Bench of the Tribunal giving reasons for exclusion of Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables because of different functions, we find merit in the submission of the Ld. Counsel for the assessee that the above two companies cannot be included in the list of comparables. We accordingly direct the TPO/AO to exclude Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables.

38. Now coming to the addition of Rs.4.63 crores in respect of Design Engineering and Testing Authoring Services Segment, we find the assessee had selected 4 companies as comparable entities for determining the ALP and finally he submitted a revised list of 2 comparables, namely Ace Software Exports Ltd., and Genesis International Corporation Ltd. We find Ace Software Exports Ltd., was rejected by the TPO because it has shown negative operating profit by operating costs (OP/OC). While the TPO retained Genesis International Transaction, however, he added KLG Systel Ltd., as a comparable having OP/OC at 33.74%. It is the submission of the Ld. Counsel for the assessee that KLG Systel Ltd., is not a comparable company since the revenue from export services of KLG Systel Ltd., is only 0.24% of the total revenue as against 100%. Revenue generated by the assessee company from the export services.

38.1 From the details furnished by the assessee in paper book at pages 570 and 571, we find that as against total income of Rs.122.98 crores for the F.Y. 2006-07, the income in foreign exchange from revenue items was only Rs.29,01,158/- which comes to 0.23% of the total revenue. Although this was submitted before the DRP, however, they have not considered the same. Further, from para 6.98 of page 569 of the paper book we find the assessee has submitted before the DRP that KLG Systel Ltd., is not a comparable with the assessee company since KLG Systel Ltd.,is engaged in variety of business support services such as providing enterprise project management, automation and manufacturing and enterprise business. In view of the above, we are of the considered opinion that KLG Systel Ltd., cannot be considered as a comparable entity with that of the assessee company. We accordingly direct the TPO/AO to exclude the same from the list of comparables.

39. So far as the addition of Rs.62,72,964/- in respect of business support services segment is concerned, we find as against 11 companies selected by the assessee as comparables with average operating margin of 11.22%, the TPO rejected 5 companies and introduced 2 new companies. Although assessee has not vehemently argued for any exclusion of certain companies, however, he strongly challenged the inclusion of ICC International Agencies Ltd., and ICRA online Ltd. as fresh comparables.

40. So far as ICRA Online Ltd., is concerned we find from the various details filed by the assessee that it is engaged in functionally different business from that of the assessee company. From the details furnished by the assessee in the paper book at page 438 we find the said company is a leading information services and technology services provider, it is engaged in products of various mutual funds houses and the Flagship product of the said company is "MFI Explorer". Since the assessee is engaged in providing business support services to its AE and unlike ICRA online Ltd., it is not engaged in development and sale of products, therefore, the ICRA online Ltd., in our opinion is not a comparable with that of the assessee company. In this view of the matter, we hold that ICRA Online Ltd., cannot be considered as a comparable with that of the assessee company. Accordingly, same is directed to be excluded.

41. Now coming to the final argument of the Ld. Counsel for the assessee that some working capital adjustment is to be given for which he relied on various decisions, we find merit in the same. Although the assessee has made substantial submissions before the TPO, we find he has rejected the same and the DRP without giving any reason has simply accepted the findings given by the TPO. From the various decisions relied on by the Ld. Counsel for the assessee we find that it has been held in those decisions that proper adjustment has to be made in respect of differences in working capital of the comparable companies. Since the assessee company is a captive unit which bears risks as compared to the other companies operating in the open market and does not own any intangible or technology, therefore, we find merit in the submission of the Ld. Counsel for the assessee that the profit earned by the assessee company would be much lower as compared to the other companies and some working capital adjustment has to be granted to the assessee in respect of the differences in working capital of the comparable companies. In view of the above and in view of the various decisions relied on by the Ld. Counsel for the assessee, we are of the opinion that some working capital adjustment has to be granted to the assessee in the instant case. We, therefore, restore this issue to the file of the AO/TPO to consider reasonable percentage of working capital adjustment after giving due opportunity of being heard to the assessee and decide the issue as per law. So far as the issue of adjustment of +/- 5% the issue is restored to the file of the AO/TPO with a direction to calculate the final adjustment that is required to be made in the light of our above discussion and then decide the issue as per law. We hold and direct accordingly. Grounds raised by the assessee are accordingly allowed for statistical purposes.

42. In the result, the appeal filed by the assessee is partly allowed.